Adjusting Journal Entry Overview, Types, Examples

The costs of the supplies not yet used are reported in the balance sheet account Supplies and the cost of the supplies used during the accounting period are reported in the income statement account Supplies Expense. Income statement accounts that may need to be adjusted include interest expense, insurance expense, depreciation expense, and revenue. The entries are made in accordance with the matching principle to match expenses to the related revenue in the same accounting period. The adjustments made in journal entries are carried over to the general ledger that flows through to the financial statements. 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.

The adjusting entry is made when the goods or services are actually consumed, which recognizes the expense and the consumption of the asset. Generally, adjusting journal entries are made for accruals and deferrals, as well as estimates. Sometimes, they are also used to correct accounting mistakes or adjust the estimates that were previously made. Companies that use accrual accounting and find themselves in a position where one accounting period transitions to the next must see if any open transactions exist.

Further, the company has a liability or obligation for the unpaid interest up to the end of the accounting period. What the accountant is saying is that an accrual-type adjusting journal entry needs to be recorded. In such a case, the adjusting journal entries are used to reconcile these differences in the timing of payments as well as expenses.

Sometimes an entire job is not completed within the accounting period, and the company will not bill the customer until the job is completed. The earnings from the part of the job that has been completed must be reported on the month’s income statement for this accrued revenue, and an adjusting entry is required. As mentioned before, there are five commonly used types of adjusting entries. These are accrued expenses, accrued revenues, deferred expenses, deferred revenues, and depreciation expenses. For deferred revenue, the cash received is usually reported with an unearned revenue account. Unearned revenue is a liability created to record the goods or services owed to customers.

Types and examples of adjusting entries:

For example, a service providing company may receive service fees from its clients for more than one period, or it may pay some of its expenses for many periods in advance. All revenues received or all expenses paid in advance cannot be reported on the income statement for the current accounting period. They must be assigned to the relevant https://www.bookkeeping-reviews.com/cake-decorator-job-description/ accounting periods and must be reported on the relevant income statements. However, as of December 31 only one month of the insurance is used up. Hence the cost of the remaining five months is deferred to the balance sheet account Prepaid Insurance until it is moved to Insurance Expense during the months of January through May.

In this case someone is already performing a service for you but you have not paid them or recorded any journal entry yet. The transaction is in progress, and the expense is building up (like a “tab”), but nothing has been written down yet. This may occur with employee wages, property taxes, and interest—what you owe is growing over time, but you typically don’t record a journal entry until you incur the full expense. For the adjusting entry, you debit the appropriate expense account for the amount you owe through the end of the accounting period so this expense appears on your income statement. You credit an appropriate payable, or liability account, to indicate on your balance sheet that you owe this amount. An adjusting journal entry involves an income statement account (revenue or expense) along with a balance sheet account (asset or liability).

If you know the logic of adjusting entries, you can work with them properly in accounting. Adjusting entries are needed to account for the shared resources depreciation expense and update the asset’s carrying value. This is the last type of adjusting entry we will cover in this article.

Pro-Forma Entry

Some revenue accrues over time and is earned over more than one accounting period. When this is the case, the amount earned must be split over the months involved in completing the job based on when the work is done. Assume the transaction above was recorded four times for each Friday in June. The $4,000 balance in the Wages Expense account will appear on the income statement at the end of the month. Look at the five types of adjusting entries above and understand the reasoning why the entries are set up as such.

1. Both accomplish the same goal but slightly differ in how transactions are recognized.
2. For deferred revenue, the cash received is usually reported with an unearned revenue account.
3. Adjusting entries are made to ensure that the part that has occurred during a particular month appears on that same month’s financial statements.
4. The company had already accumulated $4,000 in Wages Expense during June — $1,000 for each of four weeks.
5. The purpose of adjusting entries is to convert cash transactions into the accrual accounting method.

When a transaction is started in one accounting period and ended in a later period, an adjusting journal entry is required to properly account for the transaction. When the exact value of an item cannot be easily identified, accountants must make estimates, which are also considered adjusting journal entries. Taking into account the estimates for non-cash items, a company can better track all of its revenues and expenses, and the financial statements reflect a more accurate financial picture of the company. In accrual accounting, revenues and the corresponding costs should be reported in the same accounting period according to the matching principle.

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets. Wages Payable has a zero balance on 7/3 since nothing is owed to employees for the week now that they have been paid the $1,000 in cash. Accrued expense refers to an expense that the company has not paid yet but it has already incurred. When you join PRO Plus, you will receive lifetime access to all of our premium materials, as well as 10 different Certificates of Achievement.

The adjusting entry for an accrued expense updates the Wages Expense and Wages Payable balances so they are accurate at the end of the month. Expressed another way, accrual adjusting entries are the means for including transactions that occurred during the current accounting period but have not yet been recorded in a company’s general ledger accounts. Without accrual adjusting entries those transactions will likely be reported in a later accounting period. This means that the financial statements for two accounting periods will be reporting incorrect amounts. Sometimes companies collect cash from their customers for which goods or services are to be delivered in some future period.

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Utilities provide the service (gas, electric, telephone) and then bill for the service they provided based on some type of metering. As a result the company will incur the utility expense before it receives a bill and before the accounting period ends. Hence, an accrual-type adjusting journal entry must be made in order to properly report the correct amount of utilities expenses on the current period’s income statement and the correct amount of liabilities on the balance sheet.

Similarly, your insurance company might automatically charge your company’s checking account each month for the insurance expense that applies to just that one month. Similar to an accrual or deferral entry, an adjusting journal entry also consists of an income statement account, which can be a revenue or expense, and a balance sheet account, which can be an asset or liability. 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. The adjusting entry will debit interest expense and credit interest payable for the amount of interest from December 1 to December 31.

Property taxes are paid to the county in which a business operates and are levied on real estate and other assets a business owns. Typically the business operates for a year and pays its annual property taxes at the end of that year. At the beginning of the year, the company does have an estimate of what its total property tax bill will be at the end of the year.