Adjustments: Steps For Recording Adjusting Entries
Adjustments: Steps For Recording Adjusting Entries
Adjustments: Steps For Recording Adjusting Entries
ADJUSTMENTS
Adjusting entries are made in your accounting journals at the end of an accounting period after a
trial balance is prepared. The purpose of adjusting entries is to adjust revenues and expenses to
the accounting period in which they occurred. After the entries are made in the accounting
journals, they are posted to the general ledger in the same way as any other accounting journal
entry.
• Accrued Revenues - Under the accrual method of accounting, a business needs to report all of
the revenues (and related receivables) that it has earned during an accounting period.
• Accrued Expenses - The financial statements of a business must report all of the expenses (and
related payables) that it has incurred during an accounting period.
• Deferred Revenues - The amounts received in advance of being earned must be deferred to a
liability account until they are earned.
• Deferred Expenses - Any payments for future expenses must be deferred to an asset account
until the expenses are used up or have expired.
• Depreciation Expense - Depreciation allocates the asset's cost (minus any expected salvage
value) to expense in the accounting periods in which the asset is used.
A real account has a balance that is measured cumulatively, rather than from period to period.
Real accounts include all accounts in the balance sheet. They are also called permanent accounts
or balance sheet accounts.
All adjusting entries include at least a nominal account and a real account. Note: "Adjusting
entries" refer to the 6 entries mentioned above. However, in some branches of accounting
(especially auditing), the term adjusting entries could refer to any entry that aims to adjust
incorrect account balances.
As a result, there is little distinction between "adjusting entries" and "correcting entries" today.
In the traditional sense, however, adjusting entries are those made at the end of the period to take
up accruals, deferrals, prepayments, depreciation and allowances.