Introduction to Adjusting Entries

Adjusting Entries:

"Adjusting entries are journal entries made at the end of accounting period to allocate revenue and expenses to the period in which they actually applicable."

• Adjusting entries are required because normal journl entries are based on actual transactions and the date on which these transactions occur may not be the date required for the matching principle of accrual based accounting.

Prepayments:

Adjusting entries for prepayments are necessary for cash that received before delivery of goods or services.

--> When this cash is paid, firstly it is recorded in a prepaid expense account on asset side, this amount is to be expired with the time e.g. rent, insurance as it is consumed.

--> A company receiving the cash for goods and services yet to be delivered will have to record the amount in an unearned revenue or liability account. An adjusting entry to record the revenue is used as necessary.

Accruals:

Accrued revenues are revenues that have been recorded, that is services have been performed or goods have been delivered, but their cash payment yet not received.

--> When the revenue is recorded, it is recorded as a receivable. Accrued expenses have not yet paid, so they are recorded in a payable account.

--> Expenses for interest, taxes, rent, and salaries are commonly accrued for reporting purposes.