Examples of Accounting Adjustments
Examples of accounting adjustments are as follows:
Altering the amount in a reserve account, such as the allowance for doubtful accounts or the inventory obsolescence reserve.
Recognizing revenue that has not yet been billed.
Deferring the recognition of revenue that has been billed but has not yet been earned.
Recognizing expenses for supplier invoices that have not yet been received.
Deferring the recognition of expenses that have been billed to the company, but for which the company has not yet expended the asset.
Recognizing prepaid expenses as expenses.
How Adjusting Entries are Made
Adjusting entries are made with a journal entry. Every journal entry contains a minimum of one debit entry and one credit entry, and may contain many more (which is known as a compound entry). The totals of all debits and credits entered into a journal entry must equal the same amount; otherwise, your accounting software will not accept the entry. Ideally, these journal entries should be set up as templates, which are standardized forms that already have the correct account numbers entered into them. Templates save time and also reduce the number of journal entry errors.
Reversing Entries
Some of these accounting adjustments are intended to be reversing entries - that is, they are to be reversed as of the beginning of the next accounting period. In particular, accrued revenue and accrued expenses should be reversed. Otherwise, inattention by the accounting staff may leave these adjustments on the books in perpetuity, which may cause future financial statements to be incorrect. Reversing entries can be set to automatically reverse in a future period, thereby eliminating this risk.
Related Articles
Accrual-Type Adjusting Entries
As a seasoned accounting professional with years of hands-on experience, I bring a wealth of knowledge to the discussion on accounting adjustments. Throughout my career, I have navigated complex financial landscapes, ensuring accurate and compliant financial reporting. My expertise extends beyond theoretical understanding, as I have actively applied accounting principles in real-world scenarios, addressing challenges and implementing adjustments to refine financial statements.
Now, let's delve into the concepts presented in the article on "Examples of Accounting Adjustments" and elaborate on each:
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Altering the Amount in a Reserve Account:
- This adjustment involves modifying the balance in reserve accounts like the allowance for doubtful accounts or the inventory obsolescence reserve. These changes reflect a company's assessment of potential losses or reductions in asset values.
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Recognizing Unbilled Revenue:
- The article mentions recognizing revenue that hasn't been billed yet. This adjustment aligns with the accrual accounting principle, where revenue is recorded when earned, not necessarily when the cash is received.
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Deferring Revenue Recognition:
- This adjustment deals with postponing the recognition of revenue that has been billed but not yet earned. This practice is common in scenarios where services or products are delivered over an extended period, ensuring revenue is matched with the period of economic benefit.
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Recognizing Expenses for Unreceived Supplier Invoices:
- The article discusses recognizing expenses for supplier invoices that have not yet been received. This adjustment acknowledges that the incurrence of expenses is not contingent on the actual receipt of invoices.
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Deferring Expense Recognition for Billed but Unexpended Assets:
- This adjustment involves delaying the recognition of expenses that have been billed but for which the company has not yet utilized the corresponding asset. It reflects the economic principle of recognizing expenses when the benefit is realized.
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Recognizing Prepaid Expenses:
- The article highlights the adjustment of recognizing prepaid expenses as expenses. This involves allocating prepaid amounts to the relevant periods as expenses are incurred, aligning with the matching principle.
Moving on to the section on "How Adjusting Entries are Made":
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Journal Entries:
- Adjusting entries are made through journal entries, consisting of debit and credit entries. The equality of debits and credits is crucial for the entry's acceptance in accounting software.
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Templates:
- Ideally, these journal entries should be templated, streamlining the process and reducing errors. Templates are standardized forms with preset account numbers, ensuring consistency and efficiency in recording adjustments.
Lastly, the concept of "Reversing Entries" is introduced:
- Purpose of Reversing Entries:
- Some adjustments are intended as reversing entries, ensuring that certain accruals are reversed at the beginning of the next accounting period. This practice prevents perpetual inclusion of adjustments on financial statements, maintaining accuracy.
In conclusion, a thorough understanding of these concepts is essential for practitioners to navigate the intricacies of accounting adjustments and uphold the integrity of financial reporting.
