Why are adjusting entries needed? Explain the types of adjusting entries with examples.

1. 1 · Explain the reason. Time period and accrual concepts: cash and earnings often fall in different periods.
2. 2 · Contrast cash and accrual bases. Use a short rupee example: cash loss vs accrual profit.
3. 3 · Prepaid expenses. Rent paid in advance: Dr Prepaid rent, Cr Rent for the unused part.
4. 4 · Unearned revenue. Fees received in advance: Dr Unearned fees, Cr Fee income for the part earned.
5. 5 · Accrued revenue and accrued expenses.
   • Commission earned, not received: Dr Receivable, Cr Commission income.
   • Salaries owing: Dr Salaries, Cr Accrued salaries.
6. 6 · Estimates. Depreciation and the allowance for doubtful debts.
7. 7 · State the rules. One income statement account and one SFP account; never cash; made at period end.
8. 8 · Conclude. Adjustments give a true profit for the period and correct assets and liabilities.

Scoring tip: Give a journal entry for each type; definitions alone earn only half the marks.