What are Accounting Adjustments?
Accounting adjustments are the business transactions that the company has not included in its accounting records on a particular date. For most transactions, the accountants will record them by using the billings from the clients, supplier’s invoices, or when the company receives cash. They will classify these transactions and enter them into a module which is specifically for that category in the accounting software. Then, the module will create the related journal entries automatically for the accountants (Also see The Rules for the Recording of Journal Entries).
However, if the accountants have not recorded the transactions when an accounting period has ended, or if the entries (Also see An Overview of Accounting Entries) do not state the impacts of certain transactions correctly, then they will need to make accounting adjustment by using adjusting entries. The objective of making these adjustments is to make the financial results that the company has reported to comply with the applicable accounting frameworks like IFRS. The accountants will make the adjustments, especially under the accrual basis.
Accounting adjustments help in ensuring that the accounts can present the true values when they are reported in the financial statements. Thus, you should make sure that your company has made adjustments accurately. If you are not familiar with accounting and your small business cannot afford to hire an in-house accountant, you may consider engaging an accounting firm in Johor Bahru to get this done.
Listed below are some examples of accounting adjustments:
– Recognising the prepaid expenses (Also see Accounting for Prepayments) as your expenses
– Recognising the revenue that you have not billed your client the invoice related to it
– Recognising the expense that you have not received the invoice from your supplier (Also see Introduction to Accrued Expenses)
– Deferring the revenue that you have billed the invoice but you have not earned it
– Deferring the expense that you have received the invoice but you have not consumed the asset
– Changing the amounts in the reserve accounts, for example, the allowance for doubtful accounts
Among the accounting adjustments mentioned above, some of them should work as reversing entries. This means that the accountants need to reverse them when the following accounting period begins, especially the accruals for revenues and expenses. If the accountants did not do so, these adjustments might stay on the books forever, and this will result in inaccurate financial statements in the future. Hence, to avoid this, they should set the adjustments as reversing entries so that the accounting software will reverse them automatically in the next period, which helps in removing the risk.