Problem:
The recording of prepaid expenses, unearned revenue, accrued revenues, and accrued expenses is very important. There has been some really good explanations provided to justify these actions. Accounts need to be adjusted at period end in order to get a more accurate picture of a company's financial condition. However, how accurate should accountants be in recording adjusting entries?
We have the ability to calculate these numbers down to the closest penny. Does this level of detail truly give us a better picture? The textbooks steer you into thinking that all of these accounts should be adjusted. With the utilization of computers, it can be done. But, is it cost justified to be that accurate? Does Microsoft/Apple/IBM/Walt Disney care about office supply balances at the end of a period? What it comes down to is what is known as professional judgement. Some of the companies that I mentioned above will go through office supplies faster that you will think. Is there a benefit to counting the actual office supply inventory at year end? Does the benefit justify the cost?
So, lets look at the practical side. Can we come up with some practical advice on when we should or should not adjust the entries at the end of the period?