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May 09
adjusting journal entries

What are adjusting journal entries in bookkeeping?

Keeping financial statements accurate is vital for any business as these documents help owners or founders to make informed business decisions and also file correct taxes. One way to keep your financial records in order is by adjusting journal entries. Understanding how the process works and how to implement will help you have a clearer picture of your company’s earnings as well as its expenses.

In this article, we will define what adjusting journal entries is, why is it necessary, enumerate the types of adjusting journal entries, and we’ll also share some tips for amending entries.

What does adjusting journal entries mean?

Adjusting journal entries are changes to entries that are already recorded in the company’s general ledger. The purpose of this is to ensure that the numbers in your records match up to the right accounting periods.

Additional information: Each transaction that your company makes requires journal entries. Journal entries are how you record these financial transactions – it helps you track how cash moves in the business, and how it enters, leaves, and moves to different accounts.

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To help you better understand adjusting journal entries, let’s take a look at this example: In February, company XYZ billed their client $2,500 for the products their products sold. On that said month, that sale was recorded in accounts receivable. The client, however, asked for a 5% discount on their purchase, which was granted, and the payment was settled through a bank transfer in March.

In accounting, there is what you call the matching principle that requires revenues and expenses to be recognized together within the same reporting period.

In the example above, adjusting an entry should be made. The said entry, shouldn’t be edited or deleted, but a new entry should be created to amend the old one. Note that adjusting journal entries should be made and completed before closing the accounting period and prior to generating financial statements.

Why is adjusting journal entries necessary?

Adjusting journal entries is necessary to convert cash transactions into the accrual accounting method. Accrual accounting is a type of financial accounting method that recognizes revenue when earned and expenses when they are incurred, regardless of when the payment was actually received or made.

Adjusting journal entries ensures that the company’s financial activities are recorded accurately. If adjustments are not made, your records may show that your businesses collected revenue even before it was earned or paid for expenses prior to when they were incurred. This will lead to discrepancies in your income and expenses, which means you won’t be able to track your revenue correctly. What’s even worse is that your financial statements would be inaccurate leading to bad decisions, poor cash flow, and possible expensive tax liabilities.

5 Types of Adjusting Journal Entries

There are five types of adjusting journal entries that you or your hired bookkeeper will make, these are accrued revenues, accrued expenses, deferred revenues, prepaid expenses, and depreciation expenses. These terms may sound intimidating, but it’s easy to distinguish the difference between them.

1. Accrued revenues

Accrued revenue refers to services provided in one month and are billed in another month. For example, a home remodeling company completed a project in May but billed their customers the following month – in this case, the business has accrued revenue. An adjusting journal entry should be made to show the revenue in the month on which the service was completed.

2. Accrued expenses

Accrued expenses, also called accrued liabilities, are the costs that the business incurred but aren’t billed to them yet. For example, the remodeling company hired a tile setter to complete the project and it was agreed that the contractor would be paid at the end of the project in May. However, the contractor only sent their invoice in June.

To fix this, the company needs to make an accrued expense adjusting journal entry so they can debit the expense account and credit the payable account.

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3. Deferred revenues

If a client pays you in advance, it will be treated as deferred revenue. So for example, even if a customer pays you a month in advance for your products, you must ensure that the income is recorded on the period when the products were delivered and when you actually incur the prepaid expenses.

4. Prepaid expenses

Prepaid expenses are assets that a business pays for in advance to use in the future. For example, if your business decides to pay six months in advance for your rent, adjusting journal entries should be made to reflect the monthly expenses on the rent in your financial records. Although in essence, you’re not actually making payments, amending this entry will help you better track your expenses and balance your books for the said periods.

5. Depreciation expenses 

Depreciation expenses refer to losses that the business pays for as the value of a company’s assets (e.g. vehicle, heavy machinery, buildings) decreases. As depreciation happens, you should record this in your financial statements so that it is accurate based on your loss.

Note, however, that the way you record depreciation on your company’s books depends on what depreciation method you use. As it typically involves large amounts with tax liability involved, it would be easier to consult an accountant or bookkeeper before recording depreciation expenses in your books.

Quick Tips for Adjusting Journal Entries

Use a spreadsheet – If you are still using spreadsheets and are doing your bookkeeping, make sure that you keep track of your company’s revenue through various accounting periods. This will help you enter and organize different entries so you can refer to them when preparing your financial statements.

Consider using accounting software – If you start using accounting software, you’ll have to ensure that you are still adjusting your entries. Compared to using spreadsheets, accounting software has a more streamlined process, where you can also easily generate financial statements.

Hire a bookkeeper – The easiest route to correctly adjusting journal entries is to work with a bookkeeper so you don’t have to worry about amending entries on your records. Another advantage is your financial statements are also prepared for you by your bookkeeper.

How Akuracy can help

If you are looking for a reliable bookkeeper to help you with adjusting journal entries, you can reach out to us at Akuracy.

When you work with us, we’ll provide you with a dedicated bookkeeper as your go-to person if you have questions.

Your bookkeeper is also backed up by a team of experts so you’ll always have someone taking care of your books and managing your finances.

Contact us at help@akuracy.com or call/text us: (855) 666-9829.

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