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April 20, 2006

What are adjusting entries?

Adjusting entries are usually made on the last day of an accounting period (year, quarter, month) so that the financial statements reflect the revenues that have been earned and the expenses that were incurred during the accounting period.
Sometimes an adjusting entry is needed because:

  1. revenue has been earned, but it has not yet been recorded.
  2. an expense may have been incurred, but it hasn’t yet been recorded.
  3. a company may have paid for six-months of insurance coverage, but the accounting period is only one month. (This means that five months of insurance expense is prepaid and should not be reported as an expense on the current income statement.)
  4. a customer paid a company in advance of receiving goods or services. Until the goods or services are delivered, the amount is reported as a liability. After the goods or services are delivered, an entry is needed to reduce the liability and to report the revenues.

A common characteristic of an adjusting entry is that it will involve one income statement account and one balance sheet account. (The purpose of each adjusting entry is to get both the income statement and the balance sheet to be accurate.)

To see examples and to learn more, see Adjusting Entries.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.



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Comments

11 Responses to “What are adjusting entries?”

  1. trangquy on January 10th, 2008 4:24 am

    How historical cost, matching principle , relevance, reliabiliry are applied to depreciation

  2. yerffehj on October 11th, 2008 6:30 am

    adjusting entries are applied to prevent overstated or understated on both account titles as well as to the financial statements…

  3. whatever on October 22nd, 2008 1:17 pm

    please help me in my accounting lessons..

  4. Angie on October 29th, 2008 11:08 pm

    What is the other side of the entry to close out year end when a company has a net income. I know to credit retained earnings but what do I debit?

  5. oshin on November 18th, 2008 9:11 am

    how can i include the adjusted entries in a partnership transaction?

  6. ervin on June 2nd, 2009 9:46 am

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  7. Manjappa on October 21st, 2009 4:35 am

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  8. alfredo on December 2nd, 2009 8:32 pm

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  9. Murali on January 31st, 2010 3:53 am

    What do u mean by rectification ?

  10. Murali on January 31st, 2010 3:53 am

    Difference detween Reserves and Provisions ?

  11. Murali on January 31st, 2010 3:54 am

    Difference betweene Accounts Payble and Bills payble ?

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