Definition:
An adjusting entry is a journal entry made at the end of an accounting period to update account balances for items that have not yet been recorded or have been recorded incorrectly. It helps to ensure that financial statements accurately reflect a company’s financial position and performance.
Common types of adjusting entries:
- Prepaid expenses: Adjusting entries to reflect the portion of prepaid expenses that have been used up during the period.
- Unearned revenues: Adjusting entries to reflect the portion of unearned revenues that have been earned during the period.
- Depreciation: Adjusting entries to record depreciation expense for long-term assets.
- Accrued expenses: Adjusting entries to record expenses that have been incurred but not yet paid.
- Accrued revenues: Adjusting entries to record revenues that have been earned but not yet received.
Why are adjusting entries important?
- Accurate financial statements: Adjusting entries help to ensure that financial statements accurately reflect a company’s financial position and performance.
- Matching principle: Adjusting entries help to match revenues and expenses in the same period, which is a key accounting principle.
- Tax compliance: Adjusting entries can affect a company’s tax liability.
In essence, adjusting entries are a crucial part of the accounting cycle that helps to ensure the accuracy and reliability of financial statements.
