An Overview of Adjusting Entries
Adjusting entries are the journal entries that the accountants would record when an accounting period has ended to change the ending balance of some of the general ledger accounts.
These entries can make the financial position and the reported results of a company to comply better with the accounting frameworks. Generally, this means that by using the adjusting entries, the accountants can match the revenues with their related expenses according to the matching principle (Also see Accounting Period Assumption and Matching Principle: Understand their Relationship). This has an impact on the accuracy of revenues and expenses the company has reported.
When the accountants are handling the process of closing an accounting period, the adjusting entries play a crucial role. You can see this in the accounting cycle, in which the accountants should use these entries to convert a preliminary trial balance into the adjusted trial balance. Typically, to generate financial statements that comply with the accounting standards fully, the accountants must use the adjusting entries. Hence, as a business owner, if you do not know how to make those entries correctly, do not hesitate to get in touch with an accounting firm Johor Bahru and get assistance from the experts. This is to make sure that the financial statements of your company are accurate and follows the accounting frameworks like GAAP and IFRS.
The accountants may use the adjusting entries in all types of accounting transactions. Some of the examples include recording allowance for doubtful accounts, amortisation and depreciation, reserve for sales return and obsolete inventories, accrued revenue and expense, as well as impairment of assets.
There are three common types of adjusting double entries, which are estimates, accruals and deferrals. The estimate adjusting entries aim to predict the sum of reserves a company has. These include the inventory obsolescence reserve as well as the allowance for doubtful accounts. Besides, the accountants may use accrual adjusting entries to record any revenues or expenses that the company has not recorded by using standard accounting transactions. On the other hand, deferral adjusting entries are used to defer revenues or expenses that the company has recorded but has not earned or used yet.
When the accountants record an estimate, accrual or deferral adjusting entry, it would often affect an asset account or a liability account. As an instance, when an accountant accrues an expense (Also see Different Types of Transaction Cycles), there will be an increase in the liability account. The liability account will also increase if the accountant defers revenue recognition, which means he will only recognise the revenue in a later accounting period. Hence, it is clear that the adjusting entries will affect both the income statement and the balance sheet.
Most of the time, adjusting entries would involve accruals and deferrals, and this is the reason why the accountants should set the entries as reversing entries. By doing so, the accounting software will create journal entries which are exactly the opposite of the adjusting entries automatically when the next accounting period starts. This helps to eliminate the effect of the adjusting entries when the accountants look at the records of the two accounting periods.
Typically, a company will have a set of possible adjusting entries, and it will evaluate whether they need them when an accounting period has ended. For instance, closing the necessary contra accounts. The accountants should list these entries on the standard closing checklist. Besides, the accountants should consider creating a template for all adjusting entries so that they will not need to repeat the process of constructing adjusting entries every month. Also, they should reevaluate the standard adjusting entries continually and see whether they need to make any adjustments to reflect the changes that the business has gone through.