A client is extremely pleased with his company’s performance for the first month and has contacted your manager,  Mr. Johnson,   

  to see if anything else needs to be done with the company's bookkeeping. Mr. Johnson is still reviewing your qualifications, so he asks you to draft a memo for the client explaining the need for adjusting and closing entries. In this memo, explain why these entries are necessary and how they should be completed.

Submit a memo consisting of 500–750 words in which you explain to the client

  • the need for adjusting and closing entries.
  • why these entries are necessary.
  • how they should be completed.
  • what would happen if the client did not complete adjusting and closing entries.
  • how that might impact the client’s financial statements.
  • what other impact the lack of adjusting and closing entries might have. 

Expert Answers

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In accounting, it's very important to leave a "paper trail."  Every action must be justified and detailed. 

Opening entries are important as they indicate either the opening of a brand new account or the existing balance of an established account at the beginning of each new month.   All entries from that point forward in time either increase or decrease what was in the account on the first day of the month.  Opening entries need to be specifically listed as such with the opening day and amount. 

Adjusting entries are entries that are out of the ordinary for a particular type of account and "adjust" it for some reason.  They can be for any number of occurrences, but they need to draw the reader's attention and explain in as much detail as possible what happened and why.  The reason for this is that people's memories fade over time and the reason for the entry may not be so readible available in the future.  So, document it well so it's self explanatory. 

At the end of the month, there are certain accounts that need to be closed out in preparation for the next month.  Most of these accounts pertain to the income statement and are only temporary.  They need to show the closing balance when the month ended and show where the balances were moved to as they were closed.  Most will show a zero balance after they're closed for the beginning of the new month.  On the other hand, most asset, liability, and capital accounts don't usually need to be closed, but it's nice to see where the account is at the beginning of the new month.  

Neglecting opening, adjusting, and closing entries makes its difficult, if not impossible to issue the financial statements that are so vital to a company's management and financial success.  By making all necessary entries to its books, both at the beginning, in the interim, and at the ending of a set accounting period, it's easier for a company to keep a thumb on its progress on a day-to-day basis.  And of equal importance--if a company's books are ever audited, a well kept and accurate "paper trail" makes it easy to prove a company's honesty and integrity, as well as its professionalism. 

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