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    Introduction To Adjusting Entries

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    Anj Hwan
    Adjusting entries are journal entries made prior to issuing financial statements to convert accounting records to the accrual basis. An example is an entry needed for interest expense on a loan between the date borrowed and the financial statement date. Similarly, an adjusting entry is required when an amount was recorded covering multiple periods, such as insurance paid for six months, to allocate the proper amount to each period's income statement and balance sheet. Adjusting entries ensure expenses are reported in the proper period and assets and liabilities are accurately stated.

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    Introduction To Adjusting Entries

    Uploaded by

    Anj Hwan
    49 views1 page
    Adjusting entries are journal entries made prior to issuing financial statements to convert accounting records to the accrual basis. An example is an entry needed for interest expense on a loan between the date borrowed and the financial statement date. Similarly, an adjusting entry is required when an amount was recorded covering multiple periods, such as insurance paid for six months, to allocate the proper amount to each period's income statement and balance sheet. Adjusting entries ensure expenses are reported in the proper period and assets and liabilities are accurately stated.

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    INTRODUCTION TO ADJUSTING ENTRIES

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    Adjusting entries are journal entries made prior to issuing financial statements to convert accounting records to the accrual basis. An example is an entry needed for interest expense on a loan between the date borrowed and the financial statement date. Similarly, an adjusting entry is required when an amount was recorded covering multiple periods, such as insurance paid for six months, to allocate the proper amount to each period's income statement and balance sheet. Adjusting entries ensure expenses are reported in the proper period and assets and liabilities are accurately stated.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    49 views1 page

    Introduction To Adjusting Entries

    Uploaded by

    Anj Hwan
    Adjusting entries are journal entries made prior to issuing financial statements to convert accounting records to the accrual basis. An example is an entry needed for interest expense on a loan between the date borrowed and the financial statement date. Similarly, an adjusting entry is required when an amount was recorded covering multiple periods, such as insurance paid for six months, to allocate the proper amount to each period's income statement and balance sheet. Adjusting entries ensure expenses are reported in the proper period and assets and liabilities are accurately stated.

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    INTRODUCTION TO ADJUSTING ENTRIES

    By: Harold Avercamp, CPA, MBA

    Adjusting entries are accounting journal entries that convert a company's


    accounting records to the accrual basis of accounting. An adjusting journal entry is
    typically made just prior to issuing a company's financial statements.
    To demonstrate the need for an accounting adjusting entry let's assume that a
    company borrowed money from its bank on December 1, 2019 and that the company's
    accounting period ends on December 31. The bank loan specifies that the first interest
    payment on the loan will be due on March 1, 2020. This means that the company's
    accounting records as of December 31 do not contain any payment to the bank for the
    interest the company incurred from December 1 through December 31. (Of course the
    loan is costing the company interest expense every day, but the actual payment for the
    interest will not occur until March 1.)
    For the company's December income statement to accurately report the
    company's profitability, it must include all of the company's December expenses—not
    just the expenses that were paid. Similarly, for the company's balance sheet on
    December 31 to be accurate, it must report a liability for the interest owed as of the
    balance sheet date. An adjusting entry is needed so that December's interest expense
    is included on December's income statement and the interest due as of December 31 is
    included on the December 31 balance sheet. The adjusting entry will debit Interest
    Expense and credit Interest Payable for the amount of interest from December 1 to
    December 31.
    Another situation requiring an adjusting journal entry arises when an amount has
    already been recorded in the company's accounting records, but the amount is for more
    than the current accounting period. To illustrate let's assume that on December 1, 2019
    the company paid its insurance agent $2,400 for insurance protection during the period
    of December 1, 2019 through May 31, 2020. The $2,400 transaction was recorded in
    the accounting records on December 1, but the amount represents six months of
    coverage and expense. By December 31, one month of the insurance coverage and
    cost have been used up or expired. Hence the income statement for December should
    report just one month of insurance cost of $400 ($2,400 divided by 6 months) in the
    account Insurance Expense. The balance sheet dated December 31 should report the
    cost of five months of the insurance coverage that has not yet been used up. (The cost
    not used up is referred to as the asset Prepaid Insurance. The cost that is used up is
    referred to as the expired cost Insurance Expense.) This means that the balance sheet
    dated December 31 should report five months of insurance cost or $2,000 ($400 per
    month times 5 months) in the asset account Prepaid Insurance. Since it is unlikely that
    the $2,400 transaction on December 1 was recorded this way, an adjusting entry will be
    needed at December 31, 2019 to get the income statement and balance sheet to report
    this accurately.

    Reference:

    https://www.accountingcoach.com/adjusting-entries/explanation

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