What are Adjusting Entries?Adjusting entries are journal entries recorded at the end of an accounting period to alter the ending balances in various general ledger accounts. Show
Why Make Adjusting Entries?These adjustments are made to more closely align the reported results and financial position of a business with the requirements of an accounting framework, such as GAAP or IFRS. This generally involves the matching of revenues to expenses under the matching principle, and so impacts reported revenue and expense levels. In essence, the intent is to use adjusting entries to produce more accurate financial statements. When to Make Adjusting EntriesThe use of adjusting journal entries is a key part of the period closing processing, as noted in the accounting cycle, where a preliminary trial balance is converted into a final trial balance. It is usually not possible to create financial statements that are fully in compliance with accounting standards without the use of adjusting entries. Thus, adjusting entries are created at the end of a reporting period, such as at the end of a month, quarter, or year. Types of Adjusting EntriesAn adjusting entry can used for any type of accounting transaction; here are some of the more common ones:
When you record an accrual, deferral, or estimate journal entry, it usually impacts an asset or liability account. For example, if you accrue an expense, this also increases a liability account. Or, if you defer revenue recognition to a later period, this also increases a liability account. Thus, adjusting entries impact the balance sheet, not just the income statement. Types of Adjusting EntriesAs shown in the preceding list, adjusting entries are most commonly of three types. The first is the accrual entry, which is used to record a revenue or expense that has not yet been recorded through a standard accounting transaction. The second is the deferral entry, which is used to defer a revenue or expense that has been recorded, but which has not yet been earned or used. The final type is the estimate, which is used to estimate the amount of a reserve, such as the allowance for doubtful accounts or the inventory obsolescence reserve. Reversing EntriesSince adjusting entries so frequently involve accruals and deferrals, it is customary to set up these entries as reversing entries. This means that the computer system automatically creates an exactly opposite journal entry at the beginning of the next accounting period. By doing so, the effect of an adjusting entry is eliminated when viewed over two accounting periods. Adjusting Entry Best PracticesA company usually has a standard set of potential adjusting entries, for which it should evaluate the need at the end of every accounting period. These entries should be listed in the standard closing checklist. Also, consider constructing a journal entry template for each adjusting entry in the accounting software, so there is no need to reconstruct them every month. The standard adjusting entries used should be reevaluated from time to time, in case adjustments are needed to reflect changes in the underlying business. Examples of Adjusting EntriesDepreciation: Arnold Corporation records the $12,000 of depreciation associated with its fixed assets during the month. The entry is:
How does adjusting entries affect financial statements?Impact on the Income Statement
Adjusting entries aim to match the recognition of revenues with the recognition of the expenses used to generate them. A company's net income will increase when revenues are accrued or when expenses are deferred and decrease when revenues are deferred or when expenses are accrued.
What is the entry to adjust for the cost of supplies used during the accounting period?a. Supplies Expense, debit; Supplies, credit. This is the correct option.
What is the adjusting entry to record supplies used?The adjusting entry is the difference between the beginning balance in the supplies account and the actual supplies remaining. For example, if the beginning balance is $5,000 and you have $4,000 of supplies on hand, you used $1,000 of supplies during the month.
What does the adjusting entry affect?Adjusting entries are done at the end of a period. All adjusting entries will affect either an expense account or a revenue account.
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