Adjusting Entries

Content What are Adjusting Entries? What Is an Adjusting Journal Entry? The Adjusting Process And Related Entries Types of Adjusting Entries Adjusting Prepaid Asset Accounts Adjusting Entries: Practice Problems At the end of the accounting period, the cost of supplies used during the period becomes an expense and an adjusting entry is made. As one can see on each year’s balance sheet, the asset continues to be reported at its $150,000 cost. However, it is also reduced each year by the ever-growing accumulated depreciation. The asset cost minus accumulated depreciation is known as the book value (or “net book value”) of the asset. It represents a liability because a company may receive cash in advance of performing a service, or providing a good. Items such as rent, magazine subscriptions, and customer deposits, all received in advance are examples of unearned revenue. Unearned revenue is a liability because if the good https://www.bookstime.com/ or service is not provided, the cash received will have to be paid back (it is owed). When a payment is received from a customer for services that will be provided in a future accounting period, an unearned revenue account is credited (cash is debited) to recognize the obligation that exists. What are Adjusting Entries? Therefore, the $100,000 cost must be spread over the asset’s five-year life. At the end of an accounting period, before financial statements can be prepared, the accounts must be reviewed for potential adjustments. The unadjusted trial balance is a trial balance where the accounts have not yet been adjusted. The trial balance of Big Dog Carworks Corp. at January 31 was prepared earlier. It is an unadjusted trial balance because the accounts have not yet been updated for adjustments. What are the adjusting entries in accounting? An adjusting entry is simply an adjustment to your books to better align your financial statements with your income and expenses. Adjusting entries are made at the end of the accounting period. This can be at the end of the month or the end of the year. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. The amount of interest therefore depends on the amount of the borrowing (“principal”), the interest rate (“rate”), and the length of the borrowing period (“time”). The total amount of interest on a loan is calculated as Principal X Rate X Time. Before moving on to the next topic, consider the entry that will be needed on the next payday (January 9, 20X9). What Is an Adjusting Journal Entry? This is posted to the Interest Revenue T-account on the credit side (right side). In the journal entry, Depreciation Expense–Equipment has a debit of $75. This is posted to the Depreciation Expense–Equipment T-account on the debit side (left side). This is posted to the Accumulated Depreciation–Equipment T-account on the credit side (right side). Once you have journalized all of your adjusting entries, the next step is posting the entries to your ledger. When a transaction is started in one accounting period and ended in a later period, an adjusting journal entry is required to properly account for the transaction. The straight-line method allocates the depreciable cost equally over the asset’s estimated useful life. Our employees worked and generated revenue, so we must match the expense incurred for the revenue generated. Large companies may provide services on a daily basis and prepare many invoices during a monthly reporting period. The balance in Service Revenues will increase during the year as the account is credited whenever a sales invoice is prepared. The balance in Accounts Receivable also increases if the sale was on credit (as opposed to a cash sale). However, Accounts Receivable will decrease whenever a customer pays some of the amount owed to the company. Therefore the balance in Accounts Receivable might be approximately the amount of one month’s sales, if the company allows customers to pay their invoices in 30 days. The income statement approach does have an advantage if the entire prepaid item or unearned revenue is fully consumed or earned by the end of an accounting period. No adjusting entry would be needed because the expense or revenue was fully recorded at the date of the original transaction. The Adjusting Process And Related Entries A contra account is an account that is related to another account and typically has an opposite normal balance that is subtracted from the balance of its related account on the financial statements. Accumulated depreciation records the amount of the asset’s cost that has been expensed since it was put into use. Accumulated depreciation has a normal credit balance that is subtracted from a Plant and Equipment asset account on the balance sheet. Contra-asset accounts are asset accounts with a normal credit balance. If the adjustment was not recorded, unearned revenue would be overstated (too high) by $300 causing liabilities on the balance sheet to be overstated. When the cash is paid, an adjusting entry is made to remove the account payable that was recorded together with the accrued expense previously. If you use accounting software, you’ll also need to make your own adjusting entries. The software streamlines the process a bit, compared to using spreadsheets. But you’re still 100% on the line for making sure those adjusting entries are accurate and completed on time. Adjusting entries are also used to record non-cash expenses such as depreciation, amortization, etc. They are recorded at the end of the accounting period and closely relate to the matching principle. Types of Adjusting Entries For example, at December 31, 20X2, the net book value of the truck is $50,000, consisting of $150,000 cost less $100,000 of accumulated depreciation. By the end of the asset’s life, its cost has been fully depreciated and its net book value has been reduced to zero. Customarily the asset could then be removed from the accounts, presuming it is then https://www.bookstime.com/articles/adjusting-entries fully used up and retired. The employees are normally paid weekly, on Friday for work completed on that Friday (in other words, employees are paid current). That means, we have expenses for Monday and Tuesday that has to be accrued. Our employees worked and generated revenue, so we must match the expense incurred for the revenue generated.