What are adjusting entries?
At the end of an accounting period, adjusting entries are journal entries that are made to account balances to reflect transactions that have already occurred but have not yet been recorded. These entries are used to ensure that the financial statements are fair and accurately depict the state of a company’s financial performance.
Why adjusting entries are important?
Adjusting entries are important since they guarantee that the financial statements appropriately reflect the state of a company’s financial performance. A company’s financial statements can be misleading without adjusting entries, which could result in poor business judgement. Moreover, corrective entries aid in ensuring that financial statements adhere to Generally Accepted Accounting Principles (GAAP).
Types of Adjusting Entries
- Accruals
The purpose of these entries is to reflect income or expenses that have already been received or incurred but not yet been recorded. For instance, a business might have rendered services to a customer in March but not be paid until April. To record the revenue earned, an accrual entry would be made in March.
- Deferrals
These entries are used to record cash received or paid for a transaction that has not yet earned or incurred any earnings or expenses. For instance, a business might prepay for a 12-month insurance plan. To acknowledge the cost over the course of coverage, a deferral entry would be made.
- Depreciation
Depreciation of long-term assets, such as property, plant, and equipment, is recorded in these entries. Depreciation is the distribution of an asset’s cost over the course of its useful life.
- Allowances
An estimate of potential losses or expenses is recorded in these entries. For instance, a business might predict that a certain proportion of its accounts receivable won’t be collected. This estimate would be included as an expense in an allowance entry.
To summarize, adjusting entries are an important aspect of accounting since they help ensure that financial statements accurately reflect a company’s financial status. Maintaining accurate financial records and making wise company decisions depend on comprehending and accurately entering adjustment entries.
