Adjusting Entries

An adjusting entry is a type of accounting entry that is crucial to closing the accounting period. According to the accrual method of accounting, a company must adjust its initial trial balance as the accrual period closes. An adjusting entry records a change in an account and adjusts the ledger to accurately reflect the company’s finances after a given accounting period.

Classification of Adjusting Entries

Below are the main types of adjusting journal entry used in accounting:

• Prepayments

1. Prepaid expenses – money paid in advance for assets yet to be in the accounting period;
2. Unearned revenue/deferred revenue – income received in advance that is not yet earned.

• Accruals

1. Accrued expenses – expenses were incurred, but with no record of payment;
2. Accrued revenues – income earned but not yet recorded, nor money received for assets;
3. Periodic inventory – adjusts for inventory acquired and remaining.

• Non-cash expenses (estimates)

1. Estimated expenses – value of an expense cannot be determined
2. Fixed assets depreciation – allocation of the cost of a depreciable asset, as assets lose value over the course of their useful life

Adjusting entries concern only the above account changes, and not every entry recorded is an adjusting entry. For instance, if a company accrues an expense on the last day of the accounting period, the entry for this expense would not be an adjusting entry.

Adjusting Journal Entries Examples

Below are some examples for each type of adjusting journal entry used in accounting.

1. Prepaid expenses

A company’s insurance is $1800 for a year (paid on Jan, 1st). The company has yet to use this prepaid expense in the current accounting period, as an adjusting entry in the account denotes.

The monthly insurance cost is 1800/12 months= $150 per month.

2. Unearned revenue or deferred revenue

In this example, a company has received payment for services it has not yet provided during the accounting period. The initial accounting entry below needs to be adjusted by the second entry, which records a debit of $3000 in unearned revenue as a liability account.

Fees incurred:

Unearned revenue:

3. Accrued expenses

In this example, a company has yet to pay its $250 electricity bill for January, which is due on February 15th.

The entry accounting for this expense, below, will be recorded on January 31st:

Jan. 31

This accounting entry adjusts the ledger for the accrual of expenses that have yet to be paid during the given period.

4. Accrued revenue

A company delivered $3500 worth of services on the last day of July, accruing revenue without receiving payment during the accounting period. An accounting entry adjusts for this accrued revenue:

5. Non-cash expenses

A company estimates depreciation of its equipment to be $350 per month.  Accounting for this loss, the adjusting entry for the accounting period (say, September) would be:

Sept. 30

6. Periodic Inventory

A company starts the year with $5000 of inventory, goes on to purchase $2500 of additional stock during a three-month period. The accounting entry below shows that there is $4000 remaining in ending inventory, which becomes the beginning amount for the next quarter.

These entry examples show the uses of adjusting entries in accounting. Adjusting journal entries record changes in asset or liability accounts, such as revenue or expenses, to adjust the ledger at the end of the accrual period. Adjusting journal entries are vital pieces of the summarized general ledger information required to release the company’s financial statements under Generally Accepted Accounting Principles (GAAP) at the end of the accounting period.  Thus, adjusting journal entries are crucial records in the accounting process and allow companies to more accurately evaluate their position at the end of the period.