See Also:
Accounting Principles
Accounting Concepts
Accrual Based Accounting
Prepaid Income Tax
Deferred Revenue
Adjusting Entries Definition
There are generally two types of adjusting journal entries done during the period. First, an adjusting entry can be an entry made at the end of a period. These adjusting entries record an unrecognized revenue or expense occurred during the current period, but concluded in the next or another period. The second type of adjusting entries are the correcting entries. Perform these correcting entries when you find a mistake in the financials.
Adjusting Entries Explained
The first type of adjusting entries has the following four basic types:
Accrued Expenses
Accrued expenses is an expense that occurs during the period, but the total cost has not been paid. Thus, the company recognizes this as an accrual and pays for it during the next period reducing the accrued expense account.
Accrued Revenue
Like the accrued expense, accrued revenue is when a service has been performed or a product has been delivered, but the company has not received payment yet.
Unearned Revenue
Generate the unearned revenue account when a company has been paid for services or a product, but the company has not yet delivered the service or product. Therefore, an entry is made and revenue is recognized as the cash is received from the company.
Pre-Paid Expense
A pre-paid expense is when a company pays for a service or product in the future. Thus, you cannot recognize the expense until they have received the product or service.
The second type is the correcting entry, which can typically occur at any point during the year for a company. If some error was made in the financials, then there needs to be an adjusting entry to insure that the company is posting meaningful amounts to investors or management.
Adjusting Entries Example
For example, Aztec Co. specializes in the rental of office space for several of the buildings that it owns. Mayan Co. has just found some office space in an Aztec location and decides to pay the rent for the entire year totaling $36,000. Each company would give the following adjusting entries at the beginning to the end of the year:
Aztec
Beginning of year:
Cash………………………………….$36,000
Unearned Revenue…………………………$36,000
End of Year:
Unearned Revenue………………$36,000
Revenue…………………………………………$36,000
Mayan
Beginning of year:
Pre-Paid Rent……………………….$36,000
Cash………………………………………………$36,000
End of Year:
Rent Expense……………………….$36,000
Pre-Paid Rent………………………………….$36,000
Note: Most companies file financials at the end of each quarter and would recognize the amount of revenue and expense per quarter in increments of $9,000($36,000/4 Qs).
Is your closing process as efficient as it could be? Access our Complete Monthly Close Checklist to use when closing your company’s or your client’s monthly books.
