Final answer:
Adjusting entries in accounting are necessary for making the ledger reflect the true financial position by recognizing expenses and revenues in the period they are incurred, rather than when cash is exchanged. These adjustments ensure adherence to the accrual basis of accounting and help provide an accurate picture of a company's financial health.
Step-by-step explanation:
The student's question seems to be related to the preparation of adjusting entries in accounting as part of financial statement preparation. At the end of an accounting period, businesses must make adjustments to their ledger to accurately reflect the financial position of the company. This includes adjusting for expenses that have been incurred but not yet paid (accrued expenses), revenues that have been earned but not yet received (accrued revenues), expenses that have been prepaid, and revenues that have been received in advance.
Adjusting entries are necessary for compliance with the accrual basis of accounting, which states that income and expenses should be recorded in the period they are incurred, not necessarily when cash is exchanged. This can help management and other stakeholders understand the true financial health of the business.
For example, if Coronado Rental Agency paid for a 12-month insurance policy upfront in January, they would need to record an adjusting entry each month to allocate the cost of the insurance over its effective period. This means an expense for each month's portion of the insurance cost would be recorded in the ledger, even though the cash was paid out all at once at the beginning of the year.
By March 31, without adjusting entries, various accounts won't reflect the true economic activity. For instance, the Rental Income account might not include all earned revenues, and the Utilities Expense account might not portray all expenses incurred. To rectify this, adjusting entries are made to each account as necessary. After adjustments, the financial statements like the Balance Sheet and Income Statement would accurately present the financial position and performance of Coronado Rental Agency for the period ending March 31.