ADJUSTING ENTRIES

WHAT IS ADJUSTING ENTRIES ?

Adjusting entries are usually made just prior to the preparation of the financial statements. A common characteristic of an adjusting entry is that it involves one balance sheet account and one income statement account. Terms associated with adjusting entries include:

accrual basis of accounting reports revenues when they are earned and expenses when they occur (not when a cash receipt or payment takes place).

Adjusting entry an entry usually recorded as of the last day of an accounting period so that the financial statements reflect the accrual basis of accounting. accrual adjusting entry a journal entry to record an expense or revenue that occurred, but is not yet recorded; e.g. debit Interest Expense and credit Interest Payable. deferral adjusting entry a journal entry to adjust an amount that has been previously recorded, but the amount involves several accounting periods; e.g. debit Insurance Expense and credit Prepaid Insurance, or debit Prepaid Insurance and credit Insurance Expense depending on how the transaction was recorded. “other” adjusting entry to record estimated credit losses: debit Bad Debts Expense and credit Allowance for Doubtful Accounts. reversing entry an entry made on the first day of an accounting period to reverse an accrual adjusting entry that was made on the last day of the previous accounting period; the purpose is to avoid the double-counting of an accrued expense or accrued revenue that will later be recorded via the actual source documents.