What Are Adjusting Journal Entries?

When you make an adjusting entry, you’re making sure the activities of your business are recorded accurately in time. If you don’t make adjusting entries, your books will show you paying for expenses before they’re actually incurred, or collecting unearned revenue before you can actually use the money. Let’s pause here for a moment for an explanation of what happened “behind the scenes” when you made your insurance payment on Dec. 17. When you entered the check into your accounting software, you debited Insurance Expense and credited your checking account. However, that debit — or increase to — your Insurance Expense account overstated the actual amount of your insurance premium on an accrual basis by $1,200. So, we make the adjusting entry to reduce your insurance expense by $1,200.

Thus, bringing the amounts in the general ledger accounts to their proper balances. In this article, we will be discussing the different types of adjusting entries with examples but first, let’s have a better understanding of how adjusting entries work. Since the firm is set to release its year-end financial statements in January, an adjusting entry is needed to reflect the accrued interest expense for December.

AccountingTools

An adjusting journal entry is an entry in a company’s general ledger that occurs at the end of an accounting period to record any unrecognized income or expenses for the period. When a transaction is started in one accounting period and ended https://goodmenproject.com/business-ethics-2/navigating-law-firm-bookkeeping-exploring-industry-specific-insights/ in a later period, an adjusting journal entry is required to properly account for the transaction. “Deferred” means “postponed into the future.” In this case a customer has paid you in advance for a service you will perform in the future.

• At the same time, it is a reduction in the value of the particular asset upon which depreciation has been charged.
• They account for expenses you generated in one period, but paid for later.
• Adjusting entries allow you to adjust income and expense totals to more accurately reflect your financial position.
• Fees are amounts that a company charges customers for performing services for them.
• T-accounts will be the visual representation for the Printing Plus general ledger.
• Then, you’ll need to refer to those adjusting entries while generating your financial statements—or else keep extensive notes, so your accountant knows what’s going on when they generate statements for you.
• Adjusting entries are typically made after the trial balance has been prepared and reviewed by your accountant or bookkeeper.

Examples include utility bills, salaries and taxes, which are usually charged in a later period after they have been incurred. Continuing with our example of Bob and his company, Bob’s Donut Shoppe, Inc., we need to adjust law firm bookkeeping his unadjusted trial balance at the end of the accounting cycle. The methodology states that the expenses are matched with the revenues in the period in which they are incurred and not when the cash exchanges hands.

Financial Accounting

They account for expenses you generated in one period, but paid for later. Adjusting entries are changes to journal entries you’ve already recorded. Specifically, they make sure that the numbers you have recorded match up to the correct accounting periods. As the $9,000 advance payment of rent is for a full quarter (i.e., three months), the adjusting entry made on January 31 will also be made at the end of the next two months (i.e., at the end of February and March). Using the business insurance example, you paid $1,200 for next year’s coverage on Dec. 17 of the previous year.

This means that every transaction with cash will be recorded at the time of the exchange. We will not get to the adjusting entries and have cash paid or received which has not already been recorded. If accountants find themselves in a situation where the cash account must be adjusted, the necessary adjustment to cash will be a correcting entry and not an adjusting entry. The mechanics of accounting for prepaid expenses and unearned revenues can be carried out in several ways.