ADJUSTING ENTRIES

Adjusting Entries

Introduction:-

                                     Adjusting Entries are journal entries that are made at the end of the accounting period to adjust expenses and revenues to the accounting period where they actually occurred. Generally speaking, they are adjustments based on reality, not on a source document. This is in sharp contrast to entries during the accounting period (such as utility bills or fees for services rendered) that depend on source documents.

Types of Adjusting Entries:-

There are five types of adjusting entries:-

• Accrued revenues   (also called accrued assets) are revenues already earned but not yet paid or recorded.
• Unearned revenues   (or deferred revenues) are revenues received in cash and recorded as liabilities prior to being earned.
• Accrued expenses    (also called accrued liabilities) are expenses already incurred but not yet paid or recorded.
• Prepaid expenses   (or deferred expenses) are expenses paid in cash and recorded as assets prior to being used.
• Other adjusting entries   include depreciation of fixed assets, allowances for bad debts, and inventory adjustments.

Examples of Adjusting Entries:-

Here are some typical examples of adjusting entries of each type mentioned above:

• Accrued revenues   Say your company provided $1,200 worth of consulting services to the Bogus Manufacturing Company over the past month, and today is the end of the accounting period. The consulting hours will be billed and collected next month, In this case, an adjusting entry to account for the unbilled services:

Adjusting Entry	Debits	Credits
Accounts Receivable	1,200
Consulting Fees Earned		1,200

• Unearned revenues    Bogus Manufacturing Company purchased an annual service contract from you for $24,000, which they paid up front. If only three months of their contract are within this accounting period, then that means nine months of the contract’s revenues are unearned. In order to properly reflect reality, an adjusting entry:

Adjusting Entry	Debits	Credits
Unearned Revenue	18,000
Revenue		18,000

• Accrued expenses   If you pay weekly salaries and the accounting period ends mid-week, you have accrued salary expenses that you haven’t yet paid. An adjusting entry to reflect the as-yet unpaid salaries:

Adjusting Entry	Debits	Credits
Salary Expense	7,200
Salaries Payable		7,200

• Prepaid expenses   Let’s say you paid $3,000 for your property insurance six months ago, and you still have six paid months remaining on the policy after this accounting period. To accurately reflect the value and expense of the remaining policy, An adjusting entry:

Adjusting Entry	Debits	Credits
Property Expense	1,500
Prepaid Insurance		1,500

• Other adjusting entries — Your Company purchased $1 million of manufacturing equipment two years ago, and according to your depreciation schedule it has depreciated by $350,500 this accounting period. To ensure that your balance sheet doesn’t overstate the equipment’s value, An adjusting entry:

Adjusting Entry	Debits	Credits
Depreciation Expense	350,500
Accumulated Depreciation – Equipment		350,500