What Is an Adjusting Journal Entry?

An adjusting journal entry is an entry in a company’s general ledger that occurs at the end of an 澳洲幸运5官方开奖结果体彩网:accounting period to record any unrecognized income or expenses f♑or the period. When a transaction is started in one accounting period and ended in a later period, an adjusting journal entry is required to properly account 🧸for the transaction.

Aꦕdjusting journal entries can also refer to financial reporting that corrects a mistake made previously✅ in the accounting period.

Understanding Adjusting Journal Entries

The purpose of adjusting entries is to convert cash transactions into the 澳洲幸运5官方开奖结果体彩网:accrual accounting method. Accrual accounting is based on the revenue recognition principle that seeks to recognize revenue in the period✱ when it was earned, rather than the period when cash is received.

As an example, assume a construction company begins construction in one period but does not invoice the customer until the work is complete in six months. T💦he construction company will need to do an adjusting journal entry at the end of each of the months to recognize revenue for 1/6 of the amount that will be invoiced at the six-month point.

An adjusting journal entry involves an 澳洲幸运5官方开奖结果体彩网:income statement account (revenue or expense) along with a 澳洲幸运5官方开奖结果体彩网:balance sheet account (asset or liability). It typically relates to the balance sheet accounts for accumulated depreciation, 澳洲幸运5官方开奖结果体彩网:allowance for doubtful accounts, 澳洲幸运5官方开奖结果体彩网:accrued expenses, 澳洲幸运5官方开奖结果体彩网:accrued income, 澳洲幸运5官方开奖结果体彩网:prepaid expenses, 澳洲幸运5官方开奖结果体彩网:deferred revenue, and 澳洲幸运5官方开奖结果体彩网:unearned revenue.

Income statement accounts that may need to be adjusted include interest expense, insurance expense, 澳洲幸运5官方开奖结果体彩网:depreciation expense, and revenue. The entries are made in accordance with the matching principle to match expenses to the related revenue in the same accounting period. The adjustments made in journal entries are carried over to the general ledger that flows through to the 澳洲幸运5官方开奖结果体彩网:financial statements.

Types of Adjusting Journal Entries

In summary, adjusting journal entries are most commonly accruals, deferrals, and estimates.

Accruals

Accruals are revenues and expenses that have not been received or paid, respectively, and have not yet been recorded through a standard accounting transaction. For instance, an accrued expense may be rent that is paid ꦡat the end of the month, even though a firm is able to occupy the space at the beginning of the month that has not yet been paid.

Deferrals

Deferrals refer to revenues and expenses that have been received or paid in advance, respectively, and have been recorded, but have not yet been earned or used. 澳洲幸运5官方开奖结果体彩网:Unearned revenue, for instance, accounts for money re♋ceived for goods not yet deli🦹vered.

Estimates

Estimates are adjusting entries that record non-cash items, such as depreciation expense, allowance for doubtful accounts, or the 澳洲幸运5官方开奖结果体彩网:inventory obsolescence reserve.

Why Are Adjusting Journal Entries Important?

Because many companies operate where actual delivery of goods may be made at a different time than payment (either beforehand in the case of credit or afterward in the case of prepayment), there are times when one accounting period will end with such a situation still pending. In such a case, the adjusting journal entries are used to reconcile these dif🎀ferences in th🐬e timing of payments as well as expenses.

Without adjusting entries to the journal, there would remain unresolved transactions that are yet to close.

Example of an Adjusting Journal Entry

For example, a company that has a fisc✅al year ending Dec. 31 takes out a loan from the bank on Dec. 1. The terms of the loan indicate that interest payments are to be made every three months. In this case, the company’s first interest payment is to be made on March 1. However, the company still needs to accrue interest expenses for the months of December, January, and February.

Since the firm is set to release its year-end financial statements in January, an adjusting entry is needed to reflect the 澳洲幸运5官方开奖结果体彩网:accrued interest expense for December. To accuratel♈y report the company’s operations and profitability, the accrued interest expense must be recorded on the December income statement, and the liability for the interest payable must be reported on the December balance sheet. Th🦂e adjusting entry will debit interest expense and credit interest payable for the amount of interest from Dec. 1 to Dec. 31.

The Bottom Line

An adjusting journal entry is a🐭n entry in a company’s general ledger that records transactions that have occurred but have not yet been appropriately recorded in accordance with the accrual method of accounting. The entry records any unrecognized income or expenses for the accounting period, sℱuch as when a transaction starts in one accounting period and ends in a later period.

Adjusting journal entries can also𒐪 refer to financial reporting that꧂ corrects a mistake made earlier in the accounting period.