Because Collecting The Adjustment Data Requires Time, The Adjusting Entries Are Often | MCQ Question Answer

The correct answer of this MCQ is “C”, as the Adjusting Entries are dated at the end of the accounting period i.e., on the last date of accounting period e.g., on 31^st December but entered on concerned ledger’s accounts later on as the adjusting process requires time which is not possible on the last day before the closing of the current accounting period.

During the adjusting process, each account (Income, Expenses, Assets, Liabilities and Equity) is carefully analyzed and examined as the Adjustments affect one Income Statement Account (Revenues and Expenses) and one Balance Sheet Account (Assets, Liabilities and Equity). Due to this effect, all the required ledger’s account balances need to be updated which makes the process more lengthy and time consuming. This process ultimately affects the Financial Statements, such as Statement of Comprehensive Income, Statement of Financial Position, Statement of Owners’ Equity and Statement of Cash Flows, which are also required updated accounting data.

In the adjusting process, the adjusting entries are made and then Adjusted Trial Balance is prepared because Unadjusted Trial Balance need to be updated due to the changes in the account balances with the passage of time. In this way updated accounting information is provided otherwise, there is wrong information about account balances in unadjusted trial balance and accounting data will not provide accurate and true & fair view to concerned stakeholders of company’s business.

Accounts whose balances are adjusted include Expenses Paid In Advance, Accrued Expenses, Unearned Revenue, Accrued Income, Accumulated Depreciation, Office Supplies, etc., In these accounts, the adjustments are needed to update the account balances at the end of the accounting period as supplies purchased of $300 on the starting of the year are consumed up during the period. Let’s say half of the supplies i.e., $150 are consumed / used during the period. Then there is a need to make adjustments for supplies used and Supplies on Hand. Supplies on hand is a Current Asset on the Balance Sheet while supplies used is an expense account recorded in Income Statement. The adjusting entry i.e., supplies used account is debited while supplies on hand account is credited, is dated at the end of the accounting period i.e., on 31^st December but entered later on when it is verified that the half of the supplies is consumed during the period. Also in case of payment of $1200 ($100 per month) received in advance from customer, Mr. A on 1^st July, then Unearned revenue account of $1200 is created and at the end of the accounting period, there is a need to check which part of revenue is earned and which is not earned. At 31^st December, $600 is earned which is treated as revenue earned account and recorded in Income Statement while remaining part of $600 is still not earned as the services are not performed against such payment received in advance. So, that part represent a current liability account named as unearned account. On the 31^st December, the adjusting entry is recorded by debited unearned revenue account of $600 and credited revenue earned account of $600 but entered later on after successful verification.

So, all of the other choices are not the correct choices except the third option c.