David (the shareholder/director) really does not understand much about accounting so he assumed that all expenses should be accounted for as an expense when paid, and therefore he could not understand when you, as his accountant, explained that the insurance premium should be recorded as a prepaid expense.

Required

(a) Explain to David the necessity of making adjusting entries at the end of an accounting period. Include in your discussion some of the accounting concepts involved and why they are important.

(b) What would have been the effect on profit if these adjusting entries had not been made, and would the reports have been useful for decision making without the necessary adjustments?