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Explain why adjusting entries are necessary

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YOU are an accountant in a medium sized manufacturing company. you have been asked to mentor an accounting clerk who is new to your accounting department.

Explain why adjusting entries are necessary.

Describe the 4 types of adjusting entries, and provide a manufacturing industry example of each.

Describe how these entries would be recorded in a computerized accounting system.

Describe 1 ethical issue that could result froom the preparation of these manufacturing entries

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Solution Preview

Adjusting entries are needed (1) to correctly accrue expenses and revenues into the proper time period, even though the cash flow is in a different time period, (2) to allocate amounts between periods to match revenues and expenses, or to (3) adjust asset valuations to comply with accounting guidelines.

The four generic AJEs arise in the four corners of this chart: (see attached for better formatting and arrows)

Receive cash Receive cash at Receive cash
Before earned same time as earning after earning

Customers Unearned Revenue no AJE needed Accounts Receivable

Vendor or Prepaids no AJE needed Accounts Payable
Employees

Deferred revenues: This is when you receive cash from customers but haven't performed the service or delivered the goods yet. You have to record the liability and then release the liability when the work is completed.

Deferred expenses: This is when you have paid but the service is not ...

Solution Summary

You tutorial is 647 words including a chart of the four classic journal entries that arise from accrual accounting and some special entries that are unique for manufacturing contexts.

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Adjusting Entries

1. Why are revenue and expense accounts called temporary or nominal accounts? please explain.

2. Under a perpetual system, what is the purpose of the cost of goods sold account?

3. What are adjusting entries and why are they necessary?

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