Adjusting entries are an important and often necessary part of your accounting!
As any small business owner knows, keeping the books can be a complicated procedure, but it is crucial that it is done accurately in order to ensure that you are staying on top of income and expenses.
The only way to keep your business afloat is by knowing exactly how much money you have coming in and how much is going out.
Balancing the books every month is the way you record all of this monetary flow.
How to compute and record end-of-period adjusting entries…
Once you’ve created a trial balance report, then it’s time to make your adjusting entries in your accounting system.
Adjustments will be necessary to account for any money that comes in or goes out ahead of actual services rendered. This is a regular occurrence for any business and requires computing and recording adjustments in order to keep the books balanced
Three basic categories of adjusting entries…
There are three basic categories of adjustments:
- revenue that has been earned but not recorded
- expenses that have been incurred and not recorded
- depreciation expenses on items that incur regular wear or tear that will affect the viability of the item in question
Each of these needs to be recorded and then computed in order to reflect actual income and expense amounts.
Unearned revenue end of the period adjustments…
For adjustments involving Unearned Revenue, this covers all income received for services not yet rendered.
For instance, if a client pays you for two months of consulting services, at the end of the first month you’ll only have earned half of that money yet you would already have received the full amount for two months.
Therefore, you need to record an adjustment that reflects the actual amount earned that month. You would then have to reflect the remainder of the income as “unearned revenue”.
Review this page on accounting journal entries if you are unfamiliar with the process of recording journal entries.
The process of recording adjusting journal entries is not too difficult.
- Figure what your current account balance is
- Determine what your current balance should be
- Record adjusting entry
Using the example above … you were paid for $500 for 2 months of consulting services. It is the end of the reporting period and you need to record an adjusting entry to show you only “earned” half of that amount…
- Debit Cash $250
- Credit Unearned Revenue $250
Adjusting entries for expenses…
In terms of expenses, adjustments can cover several different possible scenarios.
If you purchase $1,000 worth of supplies at the beginning of the accounting period, yet you’ve only used up $600 of them during that time, then your adjustment will need to reflect that $600 as supplies used, reducing the actual account to the proper balance. In the same way, an insurance adjustment reflects the actual amount spent on insurance during the accounting period as opposed to the full amount of the insurance policy.
Another expense adjustment is for salary expenses.
These are amounts owed to employees in salary that weren’t actually paid during the accounting period. This particular adjustment usually occurs when a company pays their employees at the end of a week but the monthly accounting period ends in the middle of the week. An adjustment has to be made to reflect the overlapping two or three days of the month that won’t be paid until the following week.
To record the accrued salaries…
- Debit Salaries Expense (an income statement account)
- Credit Salaries Payable (a balance-sheet short-term liabilities account)
Don’t forget after you make the actual payroll deposit in the next reporting period, you will need to…
- Debit Salaries Payable (to zero it back out)
- Credit Cash
Depreciation adjusting entries…
A depreciation adjustment is made to reflect the cost of equipment or buildings that have been used up during the accounting period.
Most property is expected to depreciate in value by a certain amount over a stated amount of time.
An estimate of that depreciation is made at the beginning of the accounting period and then an adjustment is made at the end of the period to reflect the actual depreciation during that span.
This gives you a basic idea of how to go about computing and recording adjustments.
It is a vital component of accounting for any business but especially for small businesses that can live and die by the accuracy of their books. It’s very important to make these adjustments accurately.