Regardless of how meticulous your bookkeeping is, though, there will be a need to make adjusting entries from time to time. An adjusting entry is simply an adjustment to your books to make your financial statements more accurately reflect your income and expenses, usually — but not always — on an accrual basis.
Adjusting entries are made at the end of the accounting period. Your accountant will likely give you adjusting entries to be made on an annual basis, but your bookkeeper might make adjustments monthly. Adjusting entries are typically made using a journal entry. If you use form-based accounting software — like QuickBooks , Xero or FreshBooks — you might not be familiar with journal entries. Every transaction in your bookkeeping consists of a debit and a credit.
Debits and credits must be kept in balance in order for your books to be accurate. Your form-based accounting software takes care of this for you. For example, when you enter a check in your accounting software, you likely complete a form on your computer screen that looks similar to a check. Behind the scenes, though, your software is debiting the expense account or category you use on the check and crediting your checking account.
When you make a journal entry, the form component is stripped away, and you are left with something that looks like this:. Adjusting entries usually involve one or more balance sheet accounts and one or more accounts from your profit and loss statement. In other words, when you make an adjusting entry to your books, you are adjusting your income or expenses and either what your company owns assets or what it owes liabilities.
Adjusting entries usually fall into one of four categories:. Most accruals will be posted automatically in the course of your accrual basis accounting. Another common accrual happens at year-end. If you keep your books on a true accrual basis, you would need to make an adjusting entry for these wages dated Dec.
Note: These types of adjustments are not typically made by many small-business accountants and bookkeepers, but they are valuable if you are trying to get a true handle on your income and expenses for each accounting period.
Even though the money had not yet left your account at year-end, you still incurred that expense. In true accrual basis accounting, you would need to make an adjusting entry to your books to match that expense to the period in which it was incurred. And you would do so with the following entry:. The Wages and Salaries Payable account is a liability account on your balance sheet.
When you actually pay your employees, the checking account for the business — also on the balance sheet — is impacted. But when you record accrued expenses, a liability account is created and impacted with your adjusting entry.
So, on Jan. Now, when you record your payroll for Jan. Again, this type of adjustment is not common in small-business accounting, but it can give you a lot of clarity about your true costs per accounting period. In practice, you are more likely to encounter deferrals than accruals in your small business.
The most common deferrals are prepaid expenses and unearned revenues. This would be recorded as a prepaid expense in your books. Or perhaps a customer has made a deposit for services you have not yet rendered. This would be posted as unearned revenue in your books.
The adjusting entry dated Dec. When you entered the check into your accounting software, you debited Insurance Expense and credited your checking account. And we offset that by creating an increase to an asset account — Prepaid Expenses — for the same amount.
Each month of the following year, you would make the following entry to your books:. This is posted to the Interest Revenue T-account on the credit side right side. This is posted to the Salaries Expense T-account on the debit side left side. You will notice there is already a debit balance in this account from the January 20 employee salary expense. This is posted to the Salaries Payable T-account on the credit side right side.
Once all adjusting journal entries have been posted to T-accounts, we can check to make sure the accounting equation remains balanced. Following is a summary showing the T-accounts for Printing Plus including adjusting entries. To find the total on the liabilities and equity side of the equation, we need to find the difference between debits and credits. Now that we have the T-account information, and have confirmed the accounting equation remains balanced, we can create the adjusted trial balance in our sixth step in the accounting cycle.
When posting any kind of journal entry to a general ledger, it is important to have an organized system for recording to avoid any account discrepancies and misreporting. To do this, companies can streamline their general ledger and remove any unnecessary processes or accounts.
Figure What adjusting journal entry is needed to record depreciation expense for the period? Figure Which of these transactions requires an adjusting entry debit to Unearned Revenue? Figure When a company collects cash from customers before performing the contracted service, what is the impact, and how should it be recorded?
Figure If adjusting entries include these listed accounts, what other account must be in that entry as well?
There was no previous balance in the Prepaid Insurance account at that time. Based on the information provided:. There was no beginning balance in the Unearned Revenue account for the period. Based on the information provided,. There was no previous balance in the Salaries Payable account at that time. Based on the information provided, make the December 31 adjusting journal entry to bring the balances to correct. There was no beginning of the year balance in the Supplies account. Figure Prepare journal entries to record the following business transaction and related adjusting entry.
Figure Prepare journal entries to record the following adjustments. Figure Prepare adjusting journal entries, as needed, considering the account balances excerpted from the unadjusted trial balance and the adjustment data. There was no beginning balance in the Unearned Rent account for the period.
Based on the information provided, make the journal entries needed to bring the balances to correct for:. Figure Prepare journal entries to record the business transaction and related adjusting entry for the following:.
Figure Prepare journal entries to record the following adjustments:. Figure Using the following information:. Figure Use the following account T-balances assume normal balances and correct balance information to make the December 31 adjusting journal entries.
Figure Prepare journal entries to record the following transactions. Figure Determine the amount of cash expended for Salaries during the month, based on the entries in the following accounts assume 0 beginning balances. Figure Using the following information,. Figure Determine the amount of cash expended for Insurance Premiums during the month, based on the entries in the following accounts assume 0 beginning balances.
Figure Search the web for instances of possible impropriety relating to earnings management. This could be news reports, Securities and Exchange Commission violation reports, fraud charges, or any other source of alleged financial statement judgment lapse. Skip to content The Adjustment Process. Supplies is an asset that is decreasing credit. Supplies is a type of prepaid expense that, when used, becomes an expense.
This depreciation will impact the Accumulated Depreciation—Equipment account and the Depreciation Expense—Equipment account. While we are not doing depreciation calculations here, you will come across more complex calculations in the future.
Since some of the unearned revenue is now earned, Unearned Revenue would decrease. The company would make adjusting entry for September the month you ordered debiting unearned revenue and crediting revenue. Prepaid expenses refer to assets that are paid for and that are gradually used up during the accounting period. A common example of a prepaid expense is a company buying and paying for office supplies. During the accounting period, the office supplies are used up and as they are used they become an expense.
When office supplies are bought and used, an adjusting entry is made to debit office supply expenses and credit prepaid office supplies. Depreciation is the process of assigning a cost of an asset, such as a building or piece of equipment over the economic or serviceable life of that asset. Adjusting entries for depreciation are a little bit different than with other accounts. A company has to consider accumulated depreciation.
In the contra-asset accounts, increases are recorded every month. Assets depreciates by some amount every month as soon as it is purchased. This is reflected in an adjusting entry as a debit to the depreciation expense and equipment and credit accumulated depreciation by the same amount.
Adjusting journal entries are accounting journal entries that update the accounts at the end of an accounting period. Each entry impacts at least one income statement account a revenue or expense account and one balance sheet account an asset-liability account but never impacts cash.
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