Adjusting Entries in Your Accounting Journals
Making Adjustments Accurately Is Essential for Your Records
After adjusted entries are made in your accounting journals, they are posted to the general ledger in the same way as any other accounting journal entry. There are several types of adjusting entries that can be made, with each being dependent on the type of financial activities that define your business.
Purpose of Adjusting Entries
The purpose of adjusting entries is to accurately assign revenues and expenses to the accounting period in which they occurred.
Whenever you record your accounting journal transactions, they should be done in real time. If you're using an accrual accounting system, money doesn't necessarily change hands at that time of the accounting entry; the purpose of adjusting entries is to show when the money was officially transferred, and to convert your real-time entries to entries that accurately reflect your accrual accounting system.
5 Types of Adjusting Entries
Each month, accountants make adjusting entries before publishing the final version of the monthly financial statements. The five following entries are the most common, although companies might have other adjusting entries such as allowances for doubtful accounts, for example.
Accrued Revenues: If you perform a service for a customer in one month but don't bill the customer until the next month, you would make an adjusting entry showing the revenue in the month you performed the service. You would debit accounts receivable and credit service revenue.
Accrued Expenses: A good example of accrued expenses is wages paid to employees. When a business firm owes wages to employees at the end of an accounting period, they make an adjusting entry by debiting wage expenses and crediting wages payable.
Unearned Revenues: Unearned revenues refer to payments for goods to be delivered in the future or services to be performed. If you place an order from an online retailer in February and the item does not arrive (and you don't pay for it) until March, the company from which you placed the order would record the cost of that item as unearned revenue. During the month which you made the purchase, the company would make an adjusting entry debiting unearned revenue and crediting revenue.
Prepaid Expenses: Prepaid expenses are assets that are paid for and then gradually used during the accounting period, such as office supplies. A company buys and pays for office supplies, and as they are depleted, they become an expense. During the month when the office supplies are used, an adjusting entry is made to debit office supply expense and credit prepaid office supplies.
Depreciation: Depreciation is the process of allocating the cost of an asset, such as a building or a piece of equipment, over the serviceable or economic life of the asset. Adjusting entries are a little different for depreciation. Business owners have to take accumulated depreciation into account. Accumulated depreciation is the accumulated depreciation of a company's assets over the life of the company.
The accumulated depreciation account on the balance sheet is called a contra-asset account, and it's used to record depreciation expenses. When an asset is purchased, it depreciates by some amount every month. For that month, an adjusting entry is made to debit depreciation expense and credit accumulated depreciation by the same amount.
Prepare the Adjusted Trial Balance
After you make your adjusted entries, you'll post them to your general ledger accounts, then prepare the adjusted trial balance. This process is just like preparing the trial balance except the adjusted entries are used. Make sure to correct any errors you've found.