What Are Adjustment Entries? Why Are They Passed?

Adjustment entries are entries that are passed at the end of each accounting period to adjust the nominal and other accounts so that the correct net profit or net loss is shown in the profit and loss account, and the balance sheet can also represent the true and fair view of the business’s financial condition.

Before preparing final statements, these adjustment entries must be passed. Otherwise, the profit and loss statement would be deceptive, and the balance sheet will not reflect the company’s real financial situation.

Adjusting entries are journal entries made at the end of a period to record accrued revenues or expenses and deferred revenues or expenses. For example, your company might receive a bank statement at the end of a month which says the account has earned interest. An adjusting journal entry would then be made to record the interest revenue that has accrued. Adjusting journal entries are also made to record depreciation expense, interest expense, etc. at the end of a period.