Basic Adjusting Entries for Accounting
Accountants review financial accounts at the end of each month to determine if any transactions occurred and were not recorded. These typically include noncash transactions. The accountants record these adjustments through journal entries prior to the creation of financial statements.
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Accrued Revenues
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Accrued revenues refer to income that has been earned but not recorded in the company's accounting records. Common examples of accrued revenues include services performed in one period which will be invoiced to the customer the following period and expiration of a portion of an insurance policy provided to the customer. The adjusting journal recognizes the revenue in the period the company earns it. The journal entry to recognize the services performed would include a debit to accounts receivable and a credit to fees earned. The journal entry to recognize the expiration of the insurance benefit includes a debit to unearned insurance and a credit to insurance revenue.
Accrued Expenses
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Accrued expenses refer to costs that have been incurred but not recorded in the company's accounting records. Common examples of accrued expenses include wages owed to employees which will be paid the following period and electricity used for which the company will receive an invoice the following month. The adjusting journal recognizes the expense in the period the company incurs it. The journal entry to recognize the wages would include a debit to wages expense and a credit to wages payable. The journal entry to recognize the electricity used includes a debit to utilities expense and a credit to accounts payable.
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Deferred Revenues
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Deferred revenues refer to income that has been received but not earned. Common examples of deferred revenues include magazine subscriptions paid a year in advance and deposits paid on future services. The adjusting journal entry postpones recognizing the revenue to the period the company earns it. The journal entry to recognize the initial payment of the magazine subscriptions would include a debit to cash and a credit to unearned subscription revenue. With every issue mailed to the customer, the company records a debit to unearned subscription revenue and a credit to subscription revenue. The journal entry to recognize the deposit received includes a debit to cash and a credit to revenue deposit. As the company provides the service to the customer, the company records a debit to revenue deposit and a credit to service revenue.
Deferred Expenses
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Deferred expenses refer to costs that have been paid but not used. Common examples of deferred expenses include the purchase of an insurance policy and the purchase of supplies. The adjusting journal entry postpones recognizing the expense to the period the company incurs it. The journal entry to recognize the initial payment of the insurance policy would include a debit to prepaid insurance and a credit to cash. As each month passes a portion of the insurance benefit expires.
The company records a debit to insurance expense and a credit to prepaid insurance. The journal entry to recognize the purchase of supplies includes a debit to supplies and a credit to cash. As the company uses the supplies, the company records a debit to supplies expense and a credit to supplies.
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