what is meaning of Adjusting entry
An adjusting journal entry is a general ledger entry made after an accounting period to report any unrealized revenue or costs for the period. When a transaction begins in one accounting period and ends in another, an adjusting journal entry is necessary to account for the transaction appropriately.
- Adjusting journal entries are used to reflect transactions that have happened but have not yet been adequately recorded using the accrual method of accounting.
- To comply with the matching and revenue recognition rules, journal entries are entered in a company’s general ledger after an accounting period.
- Accruals, deferrals, and estimations are the most frequent forms of modifying journal entries.
- When one accounting period ends and another begins, it is utilized for accrual accounting purposes.
- Cash-based businesses do not need to modify journal entries.
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WHY ARE ADJUSTING ENTRIES NECESSARY
After preparing your original trial balance, you can create and post your adjusting entries and then run an adjusted trial balance when the Journal entries have been posted to your general ledger. Adjusting entries are used to verify that your financial accounts represent accurate facts.
If no adjustment entries are made, your balance sheet, profit and loss statement (income statement), and cash flow statement will be inaccurate.
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WHEN ADJUSTING ENTRIES ARE REQUIRED
Additional journal entries, known as adjusting entries, are made before preparing financial statements to ensure that the company’s financial records comply with the revenue recognition and matching standard.
Adjusting entries are required because a single transaction may influence revenues or costs in more than one accounting period, and all transactions are not always documented throughout the period.
TYPES OF ADJUSTING ENTRIES
Revenues earned
You must make an accrued revenue adjustment when revenue is generated in one accounting period but not recognized until a subsequent period.
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EXPENSES PAID
Once you’ve mastered accrued revenue, accrued expense adjustments are relatively simple. They account for costs incurred during one time but paid for later.
REVENUES THAT HAVE BEEN DEFERRED
Deferred income occurs when you get paid in advance by a client. Even if you are paid now, you must ensure that the revenue is recorded in the month you perform the service and incur the prepaid expenses.
PREPAID EXPENSES
Prepaid expenses function similarly to delayed revenue. Except, in this case, you’re paying for something upfront and then recording the expense for the period to which it applies.
DEPRECIATION COSTS
When you depreciate an asset, you make a single payment but spread the expenditure across many accounting periods. This is typically done with large purchases such as equipment, vehicles, or buildings.
