Accounting: Adjusting Entries

Instead, a contra account called accumulated depreciation must be credited. At the end of an accounting period, before financial statements can be prepared, the accounts must be reviewed for potential adjustments. The unadjusted trial balance is a trial balance where the accounts have not yet been adjusted. The trial balance of Big Dog Carworks Corp. at January 31 was prepared earlier.

• In the contra-asset accounts, increases are recorded every month.
• Each of the five steps of adjusting entries either debits an expense or credits a revenue.
• Adjusting entries are made in your accounting journals at the end of an accounting period after a trial balance is prepared.
• Remember, the goal of the adjusting entry is to match the revenue and expense of the accounting period.
• For deferred revenue, the cash received is usually reported with an unearned revenue account.
• For December 27 through 31, the company should have an asset Prepaid Insurance or Prepaid Expenses of $6,000.

The journal entry will be made at the end of each accounting period as usage or consumption occurs and corresponding expenses are verified. When supplies are purchased, they are recorded by debiting supplies and crediting cash. WARNING– be careful of where the ORIGINAL entry was posted. As an example, for unearned revenue, was the original entry posted as a credit to unearned revenue or revenue? Refer to the trial balance above which shows an unadjusted balance in prepaid insurance of $2,400.

( . Adjusting entries for accruing unpaid expenses:

This task is usually performed automatically by the accounting software, so no manual journal entry needs to be recorded. You prepaid a one-year insurance policy during the month and initially recorded it as an asset because it would last for more than one month. By the end of the month some of the insurance expired, so you reduced the value of this asset to reflect what you actually had on hand at the end of the month ($1,100). To transfer what expired, Insurance Expense was debited for the amount used and Prepaid Insurance was credited to reduce the asset by the same amount.

It is a result of accrual accounting and follows the matching and revenue recognition principles. The debit to supplies expense account is necessary because the supplies are consumed during the period, so they must be expensed. Expenses are not paid with cash, but rather recorded in journal entries. If we credit cash, then both assets and expenses will increase by $500.

The purpose of adjusting entries:

Uncollected revenue is the revenue that is earned but not collected during the period. Such revenue is recorded by making an adjusting entry at the end of accounting period. A fixed asset is a tangible/physical item owned by a business that is relatively expensive and has a permanent or long life—more than one year. Examples are equipment, furnishings, vehicles, buildings, and land.

• However, that debit — or increase to — your Insurance Expense account overstated the actual amount of your insurance premium on an accrual basis by $1,200.
• The process to ensure that all accounts are reported accurately at the end of the period is called the adjusting process.
• If an invoice has not been received, it is acceptable to make a reasonable estimate of the expense.
• After one month, $100 of the prepaid amount has expired, and you have only 11 months of prepaid taxes left.
• This is usually done with large purchases, like equipment, vehicles, or buildings.
• This is posted to the Service Revenue T-account on the credit side .

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Step 3: Explanations:

A common example of a prepaid expense is a company buying and paying for office supplies. Once you complete your adjusting journal entries, remember to run an adjusted trial balance, which is used to create closing entries. In order to create accurate financial statements, you must create adjusting entries for your expense, revenue, and depreciation accounts. Depreciation is the process of allocating the cost of an asset, such as a building or a piece of equipment, over the serviceable or economic life of the asset. Business owners have to take accumulated depreciation into account.

In 2012, she started Pocket Protector Bookkeeping, a virtual bookkeeping and managerial accounting service for small businesses. This may influence which products we review and write about , but it in no way affects our recommendations preparing adjusting entries or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. Advertising paid in advance was $6,000 and was debited to Prepaid Advertising.