Types and Purpose of Adjusting Entries

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Introduction to Adjusting Entries
Purpose, types, and composition

Introduction

Adjusting entries, or adjusting journal entries ( AJE ), are made to update the accounts and bring them to their discipline balances. The preparation of adjusting entries is an application of the accumulation concept and the match principle .

In a Nutshell
The primary coil determination of adjusting entries is to update account balances to conform with the accumulation concept of accounting .
Adjusting entries are prepare for :

  1. accrual of revenues
  2. accrual of expenses
  3. unearned income
  4. prepaid expenses
  5. depreciation
  6. bad debts & other allowances

Adjusting entries affect at least one nominal history and one real report .

Important Concepts Highlighted

The accumulation concept states that income is recognized when earn careless of when collected and expense is recognized when incur careless of when paid .
The match principle aims to align expenses with revenues. Expenses should be recognized in the period when the revenues generated by such expenses are recognized .

Purpose of Adjusting Entries

The independent determination of adjusting entries is to update the accounts to conform with the accumulation concept. At the end of the account time period, some income and expenses may have not been recorded or updated ; therefore, there is a need to adjust the bill balances.

If adjust entries are not prepared, some income, expense, asset, and liability accounts may not reflect their true values when reported in the fiscal statements. For this reason, adjusting entries are necessary .

Types of Adjusting Entries

generally, there are 4 types of adjusting entries. Adjusting entries are prepared for the following :

  1. Accrued Income – income earned but not yet received
  2. Accrued Expense – expenses incurred but not yet paid
  3. Deferred Income – income received but not yet earned
  4. Prepaid Expense – expenses paid but not yet incurred

Adjusting entries are besides made for :

  1. Depreciation
  2. Doubtful Accounts or Bad Debts, and other allowances

Composition of an Adjusting Entry

Adjusting entries affect at least one nominal report and one veridical account .
A nominal explanation is an account whose counterweight is measured from period to period. nominal accounts include all accounts in the Income Statement, plus owner ‘s withdrawal. They are besides called temp accounts or income argument accounts .
Examples of nominal accounts are : Service Revenue, Salaries Expense, Rent Expense, Utilities Expense, Drawings, etc .
A real account has a balance that is measured cumulatively, preferably than from period to period. real accounts include all accounts in the balance sail. They are besides called permanent wave accounts or remainder sail accounts .
real accounts include : Cash, Accounts Receivable, Rent Receivable, Accounts Payable, Capital, and others .
All adjusting entries include at least a nominal score and a real account .
Note: “ Adjusting entries ” refer to the 6 entries mentioned above. however, in some branches of account ( specially auditing ), the term adjusting entries could refer to any submission that aims to adjust faulty report balances .
As a result, there is short distinction between “ adjusting entries ” and “ correcting entries ” today. In the traditional sense, however, adjusting entries are those made at the end of the period to take up accruals, deferrals, prepayments, depreciation and allowances .
In the future lessons, we will illustrate how to prepare adjusting entries for each type and provide examples as we go .

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