Why is there a need for adjusting entries on accounting?

Answer:Adjusting entries are made at the end of the accounting period. Adjustments are necessary, because as a result of the passing of time, some assets and liabilities are no longer 'up to date'. Also, it can be needed to include new assets and liabilities on the balance sheet.

Examples of adjustments:

- reducing asset: depreciation on fixed assets

- reducing liability: some of the customers that paid up front (unearned revenues) have received their products (reduction of unearned revenues)

- increasing asset: the firm recognizes work in progress

- increasing liability: the firm recognizes the obligation to pay holiday money in the next period (for work performed in the current period)

Also bringing the financial statements "up to date" means it is necessary to bring the income statement and balance sheet in line with the accruals basis of accounting. Typically the books of accounts carry expenses that are yet to be incurred and should be excluded from the income statement or revenue that is yet to be earned such as prepayments that should also be excluded from the income statement.

Similarly adjsutments are also necessary to bring items such as inventory in line with physical stock counts typically held at year end.