Adjusting entries are recorded at the end of an accounting period to adjust ledger accounts for any changes that relate to the current accounting period but have not been recorded yet.
Most of the transactions which are recorded via adjusting entries are not spontaneous but are spread over a period of time. A common characteristic of all adjusting entries is that they involve at least one revenue or expense account.
Not all journal entries recorded at the end of a period are adjusting entries. For example, an entry to record a purchase on the last day of a period is not an adjusting entry. The main purpose of adjusting entries is to match revenues and expenses to the current period which is a requirement of the matching principle of accounting.
Adjusting entries are of following types:
Accruals
Accrual adjusting entries are used to record the accrual of revenue or expenses which should be matched to the current accounting period.
Examples: accrual of interest expense, depreciation expense, etc.
Prepayments
Adjusting entries for prepayments are recorded for adjustments to prepaid expenses and unearned revenue (i.e. revenue received in advance) so that the revenues and expense are matched with the respective accounting periods.
Examples: adjustments to prepaid insurance, office supplies, prepaid rent, etc.
This example is a continuation of the accounting cycle dilema we have been working on. In the previous step we prepared an unadjusted trial balance. Here we will pass adjusting entries.
| Relevant information for the preparation of adjusting entries of Company A |
| Office supplies having original cost $4,320 were unused till the end of the period. Office supplies having original cost of $22,800 are shown on unadjusted trial balance. |
| Prepaid rent of $36,000 was paid for the months January, February and March. |
| The equipment costing $80,000 has useful life of 5 years and its estimated salvage value is $14,000. Depreciation is provided using the straight line depreciation method. |
| The interest rate on $20,000 note payable is 9%. Accrue the interest for one month. |
| $3,000 worth of service has been provided to the customer who paid advance amount of $4,000. |
Adjusting Entries
| Date | Particulars | Debit | Credit |
| Jan 31 | Supplies Expense Office Supplies Supplies Expense = 22,800 − 4,320 = 18,480 | 18,480 |
18,480 |
| Jan 31 | Rent Expense Prepaid Rent Rent Expense = 36,000 ÷ 3 = 12,000 | 12,000 |
12,000 |
| Jan 31 | Depreciation Expense Accoumulated Depreciation Depreciation Expense = (80,000 − 14,000) ÷ (5 × 12) = 1,100 | 1,100 |
1,100 |
| Jan 31 | Interest Expense Interest Payable Interest Expense = 20,000 × (9% ÷ 12) = 150 | 150 |
150 |
| Jan 31 | Unearned Revenue Service Revenue | 3,000 |
3,000 |
