Adjusting Journal Entries Financial Accounting

As we discussed, accrual accounting requires companies to report revenues and expenses in the accounting period in which they were earned or incurred. An accounting period breaks down company financial information into specific time spans, and can cover a month, a quarter, a half-year, or a full year. Public companies governed by GAAP are required to present quarterly (three-month) accounting period financial statements called 10-Qs.

Principles of Accounting — Financial Accounting

The company has accumulated interest during the periodbut has not recorded or paid the amount. This creates a liabilitythat the company must pay at a future date. You cover more detailsabout computing interest in Current cash in hand journal entry Liabilities, so for now amounts are given. Long-lived assets like buildings and equipment will provide productive benefits to a number of periods. Thus, a portion of their cost is allocated to each period.

Step 4: Make Adjusting Journal Entries

When the company recognizes the supplies usage, the following adjusting entry occurs. Thus, every adjusting entry affects at least one income statement account and one balance sheet account. Non-cash expenses – Adjusting journal entries are also used to record paper expenses like depreciation, amortization, and depletion. These expenses are often recorded at the end of period because they are usually calculated on a period basis.

What is the Accounting Cycle?

Assume $200 of supplies in a storage room are physically counted at the end of the period. Since the account has a $900 balance from the December 8 entry, one “backs in” to the $700 adjustment on December 31. In other words, since $900 of supplies were purchased, but only $200 were left over, then $700 must have been used. Another type of deferral requiring adjustment is unearned revenue. To be a successful forensic accountant, one must be detailed, organized, and naturally inquisitive.

Forensic Accounting

Adjusting entries requires updates to specific account types at the end of the period. Not all accounts require updates, only those not naturally triggered by an original source document. There are two main types of adjusting entries that we explore further, deferrals and accruals.

The second is tax basis accounting that is used in establishing the tax effects of transactions in determining the tax liability of an organization. For example, a company pays $4,500 for an insurance policycovering six months. It is the end of the first month and thecompany needs to record an adjusting entry to recognize theinsurance used during the month. The following entries show theinitial payment for the policy and the subsequent adjusting entryfor one month of insurance usage. Depreciation may also require an adjustment at the end of theperiod. Recall that depreciation isthe systematic method to record the allocation of cost over a givenperiod of certain assets.

  1. Some nonpublic companies may choose to use cash basis accounting rather than accrual basis accounting to report financial information.
  2. Income Tax Expense increases (debit) and Income Tax Payableincreases (credit) for $9,000.
  3. Here are the main financial transactions that adjusting journal entries are used to record at the end of a period.
  4. Does the fraudster use the fraudulently acquired gift cards?
  5. The mechanics of accounting for prepaid expenses and unearned revenues can be carried out in several ways.

The Adjusting Process And Related Entries

The company does not use all six months of insurance immediately but over the course of the six months. At the end of each month, the company needs to record the amount of insurance expired during that month. Depreciation Expense increases (debit) and Accumulated Depreciation, Equipment, increases (credit). If the company wanted to compute the book value, it would take the original cost of the equipment and subtract accumulated depreciation.

As we discussed, accrual accounting requires companies to reportrevenues and expenses in the accounting period in which they wereearned or incurred. An accounting period breaksdown company financial information into specific time spans, andcan cover a month, a quarter, a half-year, or a full year. This is useful to usersneeding up-to-date financial data to make decisions about companyinvestment and growth. When the company keeps yearly information,the year could be based on a fiscal or calendar year.

This allocation of cost is recorded overthe useful life of the asset, or the time periodover which an asset cost is allocated. The allocated cost up tothat point is recorded in Accumulated Depreciation, a contra assetaccount. A contra account is an account pairedwith another account type, has an opposite normal balance to thepaired account, and reduces the balance in the paired account atthe end of a period.

This means that adjustments are needed to reduce the asset account and transfer the consumption of the asset’s cost to an appropriate expense account. In the last section, we took NeatNiks right up to the unadjusted trial balance at the end of the month of October. On January 9, the company received $4,000 from a customer for printing services to be performed. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish. The cycle repeats itself every fiscal year as long as a company remains in business. Often, a business will collect monies in advance of providing goods or services.

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