Question -
Answer -
In accrual base of accounting, profit and loss for a year is not dependent only in revenues in cash or expenses paid in cash during the year. Some part of the receipts and expenses that occurred in a year might be belonging to previous/future accounting period. There can be some expenses which are yet to be brought to books of account. Adjusting these items will provide a true and fair view of business.
Recording adjusting entries in preparing final accounts is necessary because of the following reasons:
1. It helps in assessing whether the final accounts reflect true profit or loss also it shows true financial position of the business.
2. It ensures accounts comply with the accrual basis of accounting.
3. It makes sure that all financial transaction belong to current fiscal year. No transaction of past or future are taken into account.
4. It provides the scope for introducing various provisions which can be made at year end, only after assessing whole year’s performance.