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Adjusting entries are extra journal entries that are prepared prior to the preparation of financial statements. These journal entries are usually prepared to ensure that the financial records of a company stick to the matching principles and revenue recognition. In simple terms, these entries are made in order to convert the accounting records of a company to the accrual basis of accounting. Since these entries are made on the basis of the revenue recognition principle, the basically relate to accrued and unearned revenues. As compared to several other entries that are made during the accounting period, adjusting entries are based on reality instead of source documents. Given that adjusting entries are often made at the conclusion of every closing period, they can either be prepared monthly, quarterly or annually depending on the company's closing period.
Adjusting entries are necessary because normal journal entries are usually dependent on the actual transactions since the dates of these transactions may not be necessary for the fulfillment of matching principle of accrual accounting ("Adjusting Entries," 2010). Furthermore, these entries are necessary because one transaction may have a huge impact on revenues or expenses of several accounting periods. This huge impact is due to the fact that every adjusting entry affects a single income statement account and a single balance sheet account. While the affected income statement account may be a revenue or expense account, the balance sheet account may be an asset or liability account ("Adjusting Entries," n.d.). For a company that has provided consulting services worth $2,000 to another company with the amount to be collected in the following month, the journal entry for the unbilled services will look like the following:
Adjusting Entry
Debits
Credits
Accounts Receivable
2,000.00
Consulting Fees Earned
2,000.00
Unearned Revenues:
These are journal entries that are also known as deferred revenues and are received in cash while being recorded as liabilities before they are earned ("Adjusting Entries in Accounting," nod.). For instance, if a company purchases an annual service contract from our company worth $30,000 which is paid up front with the first three months of the contract being within the current accounting period, the rest of the months are unearned revenues as follows:
Adjusting Entry
Debits
Credits
Unearned Revenue
30,000.00
Revenue
30,000.00
Accrued Expenses:
These are expenses incurred by a company and are yet to paid or recorded and are also known as…
References:
"Adjusting Entries." (2010). NetMBA: Business Knowledge Center. Retrieved March 30, 2011,
from http://www.netmba.com/accounting/fin/process/adjusting/
"Adjusting Entries." (n.d.). CliffsNotes: The Fastest Way to Learn. Retrieved March 30, 2011,
from http://www.cliffsnotes.com/study_guide/Adjusting-Entries.topicArticleId-21081,articleId-21016.html
"Adjusting Entries In Accounting." (n.d.). College-cram.com. Retrieved March 30, 2011, from http://www.college-cram.com/study/accounting/accounting-cycle/adjusting-entries-in-accounting/
"How to Prepare Adjusting Entries." (n.d.). eHow: Money. Retrieved March 30, 2011, from http://www.ehow.com/how_4423094_prepare-adjusting-entries.html
articles.info: Free Article. Retrieved March 30, 2011, from http://e-articles.info/e/a/title/The-steps-of-the-accounting-cycle-and-computerized-accounting-systems/
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