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This is mainly because some funds are earned over time across different transactions making them to be recorded as adjustments. In some cases, earnings are not accounted or recorded since the revenue was earned even though the cash was not received (Frenz, n.d.).
During the period of accounting, accountants usually account earnings and profits in informal ledgers. This data is later transferred to informal worksheets or formal accounting statements at the end of this period when accountants close the accounts through adjusting ending balances in the informal ledgers. Some of the common earnings and profits adjustments include addition to taxable income, subtraction from taxable income, and timing adjustments.
Importance of Accounting E&P:
As previously mentioned, accounting earnings and profits is a challenging process despite of its importance to a company. First, it helps the company to know how much profit it has realized on every financial year hence showing the growth or loss of the company. Therefore,...
Through this process, a company can end up terminating or reducing its workforce in case of loss during the financial year. Secondly, it's critical in determining the decision by financial analysts and investors to continue or withdraw their investments in the company. This is because investors and analysts are likely to depend on this data to inform their decisions because it acts as a reflection of the firm's financial health. Finally, it enables the management team to have an easy work in conducting their stock taking and also help them in setting targets.
References:
Frenz, R. (n.d.). Adjustments to Earnings & Profits. Retrieved July 10, 2012, from http://smallbusiness.chron.com/adjustments-earnings-profits-25202.html
"What Are Accounting Earnings?" WiseGeek -- Clear Answers for Common Questions.
Retrieved July 10, 2012, from http://www.wisegeek.com/what-are-accounting-earnings.htm
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