Adjusting journal entries are an integral part of the accounting process, and they can mean the difference between a successful business and one that fails. But what exactly are adjusting journal entries, why do we need them, and how do they work? In this blog post, we’ll explore all of that and more. We’ll start by defining adjusting journal entries, explaining their importance to businesses, and providing some examples. We’ll also introduce you to some simple steps you can take to ensure your books are accurate and up-to-date. So let’s get started!

What Is an Adjusting Journal Entry?

An adjusting journal entry is a special type of journal entry that is used to record transactions that have not been previously recorded. Adjusting journal entries are used to bring the financial statements of a company into compliance with generally accepted accounting principles (GAAP).

Adjusting journal entries are made at the end of an accounting period, and usually involves accruals and deferrals. An accrual is a transaction that has occurred but has not yet been recorded in the books. A deferral is a transaction that has not yet occurred but will be recorded in the future.

Adjusting journal entries are made using the accrual method of accounting, which records transactions when they occur, regardless of when the cash is actually exchanged. The accrual method gives a more accurate picture of a company’s financial position than the cash method, which only records transactions when cash changes hands.

If you use double-entry bookkeeping, each adjusting journal entry will have two sides: a debit side and a credit side. The debit side will increase one account and decrease.

What Are the Types of Adjusting Journal Entries?

There are five types of Adjusting Journal Entries given:

• Accruals

• Deferrals

• Non-Cash Expenses

• Prepaid expenses

• Depreciation expenses

1. Accruals

An accrual is a journal entry that is used to record revenue or expenses that have been incurred but have not yet been paid or recorded. This type of journal entry is important in order to maintain accurate financial statements. There are two types of accruals:

• Accrued Revenues 

• Accrued Expenses

Accrued revenues are items such as rent or interest that have been earned, but have not yet been received. 

Accrued expenses are items such as salaries, taxes, and utilities that have been incurred but not yet paid. Examples of accrued expenses include salaries and interest expenses.

2. Deferrals

A deferral is a type of journal entry that is used to record an expense or revenue that has been earned or incurred in one period but will not be recognized until a future period. This type of entry is necessary to ensure that financial statements accurately reflect the company’s financial situation.

3. Non-Cash Expenses

Non-cash expenses are expenses that do not involve any cash transactions. Examples of non-cash expenses include depreciation, amortization, and write-offs. Non-cash expenses are important because they can help a business manage its cash flow by decreasing the amount of money it needs to pay out while still recording the expense on its financial statements. 

4. Recording Accruals

Recording accruals is important because it ensures that all revenue and expenses are properly accounted for in the correct period. If journal entries for accruals are not made, then the financial statements would be inaccurate. To record an accrual, the following information is needed:

• The date of the transaction 
• A description of the transaction
• The amount of the transaction
• The account(s) affected by the transaction

Prepaid Expenses

Prepaid expenses are those that have been paid for but have not yet been used up or expired. An adjusting entry is required at the end of an accounting period to record the consumption of a prepaid expense. The following are examples of common prepaid expenses:

1. Rent: You may pay rent in advance for the upcoming month. At the end of the month, you would record an adjusting entry to decrease your prepaid rent balance and increase your rent expense by the amount that was used up during the month.
2. Insurance: You may pay insurance premiums in advance for coverage that will begin in the future. At the end of the accounting period, you would record an adjusting entry to decrease your prepaid insurance balance and increase your insurance expense by the amount that was used up during the period.
3. Supplies: You may purchase supplies in advance and store them until they are needed. At the end of the accounting period, you would record an adjusting entry to decrease your Prepaid Expenses balance and increase your Supplies Expense by the amount that was used up during the period.

Depreciation expenses

There are two types of depreciation expense:

• Straight-line Depreciation

• Accelerated Depreciation

Straight-line depreciation expense

It is the simplest and most commonly used method. It allocates an equal amount of the asset’s cost for each year of its useful life. The following formula is used to calculate the straight-line depreciation expense:

Depreciation Expense = (Asset Cost – Salvage Value) ÷ Useful Life in Years

Accelerated depreciation expense.

• It methods allocate more of the asset’s cost to the early years of its useful life and less to the later years. The following four methods are commonly used: 
• The sum-of-the-years’-digits (SYD) method.
• The double declining balance (DDB) method.
• The units-of-production (UOP) method.
• The group Depreciation method.

Other less common types of adjusting journal entries include prepayments, estimates, and allocations.

What Are the Steps for Make Adjusting Journal Entries?

Journal entries are the first step in the accounting cycle and are used to record transactions in the accounting records. Adjusting journal entries are made at the end of an accounting period to correct errors and omissions that have been found in the original journal entries. There are four steps to making adjusting journal entries:

1. identify which original journal entries need to be adjusted;
2. determine what type of adjustment is needed;
3. calculate the amount of the adjustment; and,
4. make the adjusting journal entry.

What Are Some Examples of an Adjusting Journal Entries?

Some examples of adjusting journal entries include:

1. Accruals: An accrual is an expense or income that has been incurred but not yet recorded in the accounting records. For example, if your company pays rent on the first of every month but the rent period covers from the 15th of the previous month to the 14th of the current month, you would accrue one-half month’s worth of rent expense at the end of the previous month and one-half month’s worth of rent expense at the end of the current month.
2. Depreciation: Depreciation is an allocation of an asset’s cost over its useful life. For example, if you purchase a new computer for your office with a five-year warranty, you would depreciate one-fifth of the cost each year for five years. At the end of five years, the computer would be fully depreciated and would have no residual value.
3. Deferred revenue: Deferred revenue is income that has been received but not yet earned. For example, if you sell annual subscriptions to your company’s newsletter, you would record deferred revenue at the time of sale and then recognize it as income when each issue is published throughout

When Do I Need to Make Adjusting Journal Entries?

Adjusting journal entries are typically made at the end of a company’s fiscal year. Adjusting entries are necessary to ensure that all transactions have been properly recorded and that the financial statements accurately reflect the company’s actual performance for the period. Adjusting entries may also be required throughout the year if certain events occur, such as a change in inventory methods or the addition of new equipment.

Why Are Adjusting Journal Entries Important?

Adjusting journal entries are important because they allow a company to record transactions that have occurred but have not yet been recorded in the accounting records. This ensures that the financial statements are accurate and up-to-date. Without adjusting journal entries, a company’s financial statements would only reflect transactions that have already been recorded. This could lead to errors and omissions, and give investors and other users of financial statements an inaccurate picture of the company’s financial health.

Adjusting journal entries also provide information about a company’s current operating activities. This is especially important for companies that operate on a accrual basis, as adjusting journal entries provide insight into the timing of revenue and expenses. For example, if a company sells goods on credit, the revenue will not be recognized until the goods are actually sold. However, the expenses associated with the sale (e.g., cost of goods sold) will be incurred immediately. Adjusting journal entries can help to bridge this gap between when revenue is earned and when expenses are incurred.

Conclusion

Adjusting journal entries are essential for businesses to record accurate financial data and help them stay on top of their finances. By understanding the concept of adjusting journal entries, one can gain a better understanding of how accounting works and ensure accuracy when recording transactions. We hope this article has helped you understand what adjusting journal entries are and how they should be handled in a business setting. If you need further assistance with making adjusting journal entries or have any other questions, please do not hesitate to reach out to our qualified team of professionals who would be more than happy to assist you.