Here are some notes about adjusting entries in detail:
- Definition: Adjusting entries are journal entries that are made at the end of an accounting period to reflect the effects of transactions that have not yet been recorded in the general ledger.
- Purpose: Adjusting entries are necessary because accrual accounting recognizes revenues and expenses when they are earned or incurred, not necessarily when they are received or paid. This means that some transactions may not be recorded in the general ledger until the end of the accounting period.
- Types: There are five main types of adjusting entries:
- Accrued revenues: These are revenues that have been earned but not yet received. For example, if a company provides services to a customer but does not bill the customer until the end of the month, an adjusting entry would be made to record the accrued revenue.
- Accrued expenses: These are expenses that have been incurred but not yet paid. For example, if a company pays its employees once a month, an adjusting entry would be made to record the accrued expenses at the end of the month.
- Unearned revenues: These are revenues that have been received but not yet earned. For example, if a company receives a deposit from a customer for services to be provided in the future, an adjusting entry would be made to record the unearned revenue.
- Prepaid expenses: These are expenses that have been paid but not yet incurred. For example, if a company pays for a year’s worth of insurance in advance, an adjusting entry would be made to record the prepaid expense at the end of the month.
- Depreciation: Depreciation is the allocation of the cost of an asset over its useful life. An adjusting entry is made at the end of each accounting period to record the depreciation expense.
- Recording adjusting entries: Adjusting entries are recorded in the general journal. They are typically dated as of the last day of the accounting period.
- Posting adjusting entries: Adjusting entries are posted to the general ledger after they are recorded in the general journal.
- Impact on financial statements: Adjusting entries impact the balance sheet and the income statement. They are used to ensure that the financial statements are accurate and reflect the true financial position of the company.