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Chapter 12: Q22. (page 610)

Explain why reclassification adjustments are necessary.

Short Answer

Expert verified

Reclassification adjustments are necessary because they help in the treatment of realized profit and gain.

Step by step solution

01

Definition of adjusting entries

Adjusting entries are the entries prepared at the end of a financial year to adjust the unrealized gain or profit.

02

Importance of reclassification

With the help of this, all the realized gains or losses can be adjusted in the right place. Reclassification of adjustments states that unrealized gains and unrealized losses can adjust under the head of net income. Hence this is the importance of the reclassification of adjusting entries.

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