Adjusting entries are necessary because a trial balance not contain up-to-date and complete financial information. It is true for several reasons:
- Some events are not recorded daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by employees.
- Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples are charges related to the use of buildings and equipment, rent, and insurance.
- Some items may be unrecorded. An example is a utility service bill that will not be received until the next accounting period.
Adjusting entries are required every time a company prepares financial statements. The company analyzes each account in the trial balance to determine whether it is complete and up-to-date for financial statement purpose