Adjusting entries are added at the end of an accounting period to offset transactions that may not have been posted to the general ledger. There are two types: accruals and deferrals. They can be used to account for interest earned, paychecks, prepaid expenses, unearned income, and changes in assets.
Adjusting entries are accounting entries that are designed to offset transactions that may not post to the general ledger either because they span multiple accounting periods or because the transaction did not trigger anything to post. These entries are added at the end of the accounting period before closing the books. Handling adjustment entries can be tricky, and can sometimes require a judgment call, and some people prefer to leave it in the hands of an accountant.
There are two types of adjustment entries. Accruals are expenses or income that occurred before the end of the accounting period, and deferrals are expenses or income that will occur after the accounting period ends. A simple example of an accumulation is interest earned on a bank account. If interest is not recorded in a ledger, it creates a false picture of the company’s financial health, so it is necessary to add an adjusting entry to indicate that interest has been earned, even if it has not yet been earned. paid.
Another example of accrual is services that have been rendered, but not yet paid for. It is important to note that people performed X number of services in a given month, even if the funds have not yet been received. Similarly, paychecks can be entered as an adjusting entry, indicating that the company will owe employees money based on the amount of work they’ve done, even if the paychecks haven’t been issued yet. . For example, if the pay period runs from the 15th to the 15th, but the accounting period closes on the last day of the month, an adjustment entry is needed to reflect wages earned between the 15th and the last day of the month.
Adjustment entries can be used to account for things like interest earned and paid, paychecks, prepaid expenses, unearned income, etc. Another example of an adjusting entry is an entry that is designed to account for depreciation and other changes in assets. When a company buys office supplies, for example, the expense is charged, but the supplies are considered an asset, because they have value and are controlled by the company. However, as office supplies run out, the value of the asset decreases, and this can be recorded with an adjusting entry. Also, the appreciation of assets could be recorded with the use of adjusting entries.
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