Adjusting Entries
Bookkeeping Ingredients
Adjusting entries are journal entries made and posted to the Adjusted Trial Balance at the end of an accounting period to update revenue and expense accounts so that they align with the accrual basis of accounting and the matching principle.
Why Adjusting Entries Matter
Match timing: They ensure revenues and expenses are recorded in the period they actually happen, regardless of when cash changes hands.Show true financial position: They keep the balance sheet (assets, liabilities, equity) and income statement (revenues, expenses) accurate before reports are finalized.
Never use cash: Adjusting entries almost never touch the cash account; they link an income statement account with a balance sheet account.
What Do They Adjust ?
- Accrued Revenues: Revenue you have earned by providing a good or service, but you have not yet billed or received payment for it.
- Accrued Expenses: An expense your business has incurred during the period, but you have not yet paid or recorded it.
- Deferred (Unearned) Revenues: Cash you received in advance for goods or services you have not yet delivered or performed.
- Prepaid (Deferred) Expenses: Cash you paid in advance for a service or supply that will be consumed over future periods.
- Non-Cash Estimates: Depreciation: Spreading the cost of a long-term asset (like equipment, vehicles, or buildings) over its useful life.
Betty Explains Adjusting Entries