- Adjusting entries
accounting/ accountancy, adjusting entries are journal entries usually made at the end of an accounting period to allocate incomeand expenditureto the period in which they actually occurred. The revenue recognition principleis the basis of making adjusting entries that pertain to unearned and accrued revenues under accrual-basis accounting. They are sometimes called Balance Day adjustments because they are made on balance day.
Based on the
matching principleof accrual accounting, revenues and associated costs are recognized in the same accounting period. However the actual cash may be received or paid at a different time.
Types of adjusting entries
Most adjusting entries could be classified this way:
Adjusting entries for prepayments are necessary to account for cash that has been received prior to delivery of goods or completion of services. When this cash is paid, it is first recorded in a prepaid expense asset account; the account is to be expensed either with the passage of time (e.g. rent, insurance) or through use and consumption (e.g. supplies).
A company receiving the cash for benefits yet to be delivered will have to record the amount in an unearned revenue
liabilityaccount. Then, an adjusting entry to recognize the revenue is used as necessary.
Assume a magazine publishing company Tellchix-Uread charges an annual subscription fee of $12. The cash is paid up-front at the beginning of the subscription. The revenue, based on sales basis method, is recognized upon delivery. Therefore the initial reporting of the receipt of annual subscription fee is indicated as:
Debit | Credit ---------------- Cash $12 | Unearned Revenue | $12
The adjusting entry reporting each month after the delivery is:
Debit | Credit ---------------- Unearned Revenue $1 | Revenue | $1
The unearned revenue after the first month is therefore $11 and revenue reported in the income statement is $1.
Accrued revenues are revenues that have been recognized (that is, services have been performed or goods have been delivered), but their cash payment have not yet been recorded or received. When the revenue is recognized, it is recorded as a receivable.
Accrued expenses have not yet been paid for, so they are recorded in a payable account. Expenses for interest, taxes, rent, and salaries are commonly accrued for reporting purposes.
A third classification of adjusting entry occurs where the exact amount of an expense cannot easily be determined. The
depreciationof fixed assets, for example, is an expense which has to be estimated.
The entry for bad debt expense can also be classified as an estimate.
In a periodic
inventorysystem, an adjusting entry is used to determine the cost of goods soldexpense. This entry is not necessary for a company using perpetual inventory.
US Generally Accepted Accounting Principles
* [http://www.accountingcoach.com/online-accounting-course/08Xpg01.html Adjusting Entries] Explanation with examples.
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