Q1: What are balance-day adjustments?
Balance-day adjustments are journal entries put into a firm’s accounts on the last day of an accounting period.
A firm will produce various financial statements at the end of each accounting period. Typically, these include a balance sheet (setting out a firm’s assets, liabilities and equity at a certain point in time) and an income statement (setting out a firm’s revenue and expenses and thus its profit, which is a firm’s revenue less its expenses, for a period). The financial statements are not simply a summary statement of the various transactions that have been recorded by a firm over time as they happen. Before a firm produces its financial statements, it will typically make several adjustments to its accounts. In fact, it will usually make quite a lot of adjustments. The financial statements of firms that we see are the result not just of the transactions that have occurred to the firm during its day-to-day life. The financial statements of firms are also the result of a lot of balance-day adjustments, some of which can be quite straightforward to do and others can involve a degree of judgement on the part of those preparing the financial statements. In this sense, a firm’s financial statements are an ‘adjusted’ view of its accounting records.