What is the adjusting journal entry for the period?
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Knowing when money changes hands, as opposed to when your business first recognised income or expenses, is important. That’s why it’s essential to understand basic accounting adjusting entries in greater depth. But what are adjusting entries? Learn everything you need to know about how adjusting entries work, as well as the accounts that require adjusting entries, including accrued expense adjusting entries and bad debt expense adjusting journal entries. Show
Adjusting entries explainedAdjusting entries are accounting journal entries made at the end of the accounting period after a trial balance has been prepared. After you make a basic accounting adjusting entry in your journals, they’re posted to the general ledger, just like any other accounting entry. But why do you need to use adjusting entries? Let’s find out. What is the purpose of basic accounting adjusting entries?Adjusting entries enable you to adjust revenues and expenses to the accounting period within which they occurred. When you record journal transactions normally, it should be done in real-time. This is because, under the accrual basis of accounting, you need to register income/expenses as soon as invoices are raised or bills are received. The adjusting entry, therefore, shows that money has been officially transferred. In most cases, it’s not possible to remain in compliance with accounting standards – such as the International Financial Reporting Standards (IFRS) – without using adjusting entries. Accounts that require basic accounting adjusting entriesAdjusting entries can be used for any accounting transaction. The five most common are accrued revenues, accrued expenses, unearned revenues, prepaid revenues, and depreciation. Here’s a little more about these basic accounting adjusting entries: 1. Accrued revenuesAccrued revenues are services performed in one month but billed in another. You’ll need to make an adjusting entry showing the revenue in the month that the service was completed. This is referred to as an accrued revenue adjusting entry. 2. Accrued expensesAlso known as accrued liabilities, accrued expenses are expenses that your business has incurred but hasn’t yet been billed for. Wages paid to your employees at the end of the accounting period is an excellent example of an accrued expense. You’ll need to make an accrued expense adjusting entry to debit the expense account and credit the corresponding payable account. 3. Unearned revenuesUnearned revenues are payments for goods/services that are yet to be delivered. For example, if you place an order in January, but it doesn’t arrive (and you don’t make the payment) until January, the company that you ordered from would record the cost as unearned revenue. Then, in the month you make the purchase, an adjusting entry would debit unearned revenue and credit revenue. 4. Prepaid expensesPrepaid expenses are assets that you pay for and use gradually throughout the accounting period. Office supplies are a good example, as they’re depleted throughout the month, becoming an expense. Essentially, in the month that the expense is used, an adjusting entry needs to be made to debit the expense account and credit the prepaid account. 5. DepreciationDepreciation adjusting entries are slightly different, as you’ll need to consider accumulated depreciation (i.e., the accumulated depreciation of assets over the company’s lifetime). This is referred to as a contra-asset account. Essentially, from the point at which the asset is purchased, it depreciates by the same amount each month. For that month, a depreciation adjusting entry is made, debiting depreciation expense and crediting accumulated depreciation. Other types of accounting adjusting entriesBesides the five basic accounting adjusting entries, it’s important to remember that you can use adjusting entries for any transaction. This includes bad debt expense adjusting journal entries, asset impairment adjusting entries, working capital adjustment journal entries, entries to adjust cash balances for reconciling items, and WIP adjustment journal entries. We can helpGoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments. Introduction to Adjusting EntriesDid you know? You can earn our Adjusting Entries Certificate of Achievement when you join PRO Plus. To help you master this topic and earn your certificate, you will also receive lifetime access to our premium adjusting entries materials. These include our visual tutorial, flashcards, cheat sheet, quick tests, quick test with coaching, and more. Note: You can earn any or all of our Certificates of Achievement for Adjusting Entries, Debits and Credits, Financial Statements, Balance Sheet, Income Statement, Cash Flow Statement, Working Capital and Liquidity, Financial Ratios, Bank Reconciliation, and Payroll Accounting when you upgrade your account to PRO Plus. Adjusting entries are accounting journal entries that convert a company's accounting records to the accrual basis of accounting. An adjusting journal entry is typically made just prior to issuing a company's financial statements. To demonstrate the need for an accounting adjusting entry let's assume that a company borrowed money from its bank on December 1, 2021 and that the company's accounting period ends on December 31. The bank loan specifies that the first interest payment on the loan will be due on March 1, 2022. This means that the company's accounting records as of December 31 do not contain any payment to the bank for the interest the company incurred from December 1 through December 31. (Of course the loan is costing the company interest expense every day, but the actual payment for the interest will not occur until March 1.) For the company's December income statement to accurately report the company's profitability, it must include all of the company's December expenses—not just the expenses that were paid. Similarly, for the company's balance sheet on December 31 to be accurate, it must report a liability for the interest owed as of the balance sheet date. An adjusting entry is needed so that December's interest expense is included on December's income statement and the interest due as of December 31 is included on the December 31 balance sheet. The adjusting entry will debit Interest Expense and credit Interest Payable for the amount of interest from December 1 to December 31. Another situation requiring an adjusting journal entry arises when an amount has already been recorded in the company's accounting records, but the amount is for more than the current accounting period. To illustrate let's assume that on December 1, 2021 the company paid its insurance agent $2,400 for insurance protection during the period of December 1, 2021 through May 31, 2022. The $2,400 transaction was recorded in the accounting records on December 1, but the amount represents six months of coverage and expense. By December 31, one month of the insurance coverage and cost have been used up or expired. Hence the income statement for December should report just one month of insurance cost of $400 ($2,400 divided by 6 months) in the account Insurance Expense. The balance sheet dated December 31 should report the cost of five months of the insurance coverage that has not yet been used up. (The cost not used up is referred to as the asset Prepaid Insurance. The cost that is used up is referred to as the expired cost Insurance Expense.) This means that the balance sheet dated December 31 should report five months of insurance cost or $2,000 ($400 per month times 5 months) in the asset account Prepaid Insurance. Since it is unlikely that the $2,400 transaction on December 1 was recorded this way, an adjusting entry will be needed at December 31, 2021 to get the income statement and balance sheet to report this accurately. The two examples of adjusting entries have focused on expenses, but adjusting entries also involve revenues. This will be discussed later when we prepare adjusting journal entries. For now we want to highlight some important points. There are two scenarios where adjusting journal entries are needed before the financial statements are issued:
Adjusting entries almost always involve a
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