accounting Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "languag ...

accountancy Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "langua ...

, adjusting entries are

journal A journal, from the Old French ''journal'' (meaning "daily"), may refer to: *Bullet journal, a method of personal organization *Diary, a record of what happened over the course of a day or other period *Daybook, also known as a general journal, a ...

entries usually made at the end of an accounting period to allocate

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. Fo ...

and

expenditure An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition i ...

to the period in which they actually occurred. The revenue recognition principle is 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 principle In accrual accounting, the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting and the revenue recognition principle states tha ...

accrual accounting Accrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time. Accruals in accounting For example, a company delivers a product to a customer who will pay for it 30 days l ...

revenue In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive rev ...

s and associated

cost In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in whic ...

s 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:

Prepayments

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 liability account. Then, an adjusting entry to recognize the revenue is used as necessary.

Example

Assume a magazine publishing company charges an annual subscription fee of $12. The cash is paid up-front at the start of the subscription. The income, 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.

Accruals

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. An income which has been earned but it has not been received yet during the accounting period. Incomes like rent, interest on investments, commission etc. are examples of accrued income.

Estimates

A third classification of adjusting entry occurs where the exact amount of an expense cannot easily be determined. The

depreciation In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the ...

of 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.

Inventory

In a periodic

inventory Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Inventory management is a discipline primarily about specifying the sha ...

system, an adjusting entry is used to determine the

cost of goods sold Cost of goods sold (COGS) is the carrying value of goods sold during a particular period. Costs are associated with particular goods using one of the several formulas, including specific identification, first-in first-out (FIFO), or average cost. ...

expense. This entry is not necessary for a company using perpetual inventory.

External links

Further reading:
Adjusting Entries
Explanation with examples.

{{DEFAULTSORT:Adjusting Entries Accounting terminology