Adjusting entries in manufacturing company accounting departments

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.).

Types of Adjusting Entries:

There are several types of adjusting entries with the four major ones including & #8230;

Accrued Revenues:

These types of adjusting entries are also known as the accrued assets and are revenues that have been realized by the company prior to the actual transaction that would lead to a journal entry. 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 accrued liabilities. For example, if a company accrues $50,000 in monthly salaries that are payable at the beginning of the following month, the adjusting entry will be as follows:

Adjusting Entry

Debits

Credits

Salary Expense

50,000.00

Salary Payable

50,000.00

Prepaid Expenses:

These are expenses which are paid in cash and recorded as assets before they are used and are also known as deferred expenses. When a company pays for property insurance worth $5,000 six months during the current accounting period, the adjusting entry is as follows:

Adjusting Entry

Debits

Credits

Property Expense

5,000.00

Prepaid Insurance

5,000.00

Computerized Accounting System and Ethical Issues:

A computerized accounting system has several advantages to a company's accounting department and system including reduction of mathematical errors, provides timely information and saves time and effort ("The Steps of the Accounting Cycle," n.d.). In order to appropriately record adjusting entries in a computerized accounting system, there are several necessary steps that should be followed. These steps include collecting all documents relating to the adjusting entries and preparing a list of the adjusting entries to be made with complete account descriptions. After this is done, the next steps involve tallying all the figures in both the debit and credit columns while recording their respective totals at the bottom of each column. Then, the adjusting entries should be entered into a computer, a report printed and checked for any errors ("How to Prepare Adjusting Entries," n.d.).

One of the major ethical issues that could result from the preparation of adjusting entries is that the company's management may manipulate financial results through acquiring more revenues or expenses. In order to stop such acts and misappropriation of cash, it's important for each adjusting entry to be fully approved and supported. These are some of the most important things that the new accounting clerk in the accounting department should know and remember.