.ADJUSTING ENTRIES

Adjusting entries are journal entries made at the end of the accounting period to allocate revenue and expenses to the period in which they actually are applicable. Certain transaction affect the revenue or expenses of two or more accounting periods. The purpose of adjusting entries is to assign to each accounting period appropriate amounts of revenue and expense.

The Need For Adjusting Entries

For the purpose of measuring income and preparing financial statement, the life of a business is divided into a series of accounting periods. This practice enables decisions makers to compare the financial statement of successive periods and to identify significant trends.

Types Of Adjusting Entries

The number of adjusting needed at an end of each accounting period entirely upon the nature of the company’s business activates. However, most adjusting entries fall into one of four categories

1. Converting Assets into Expenses

A cash expenditure (or cost) that will benefit more than one accounting period usually is recorded by debiting an Asset account and by crediting Cash account. Entry will be as given below;

Here and asset purchased with cash $3,000.

The assets account created actually represents the deferral of an expense. In each future period tat benefits from the use of this asset, an adjusting entry is made to allocate a portion of the asset’s cost from the balance sheet to the income statement as an expense. This adjusting entry is recorded by debiting the appropriate expense account a crediting the related asset account.  So an adjusting entry will be as below;

In above given example an asset account is decreased with$ 1,000 which was consumed in whole month and office supplies of remaining amount with $2,000 will be consumed in future time period.

Here an Asset is converting into an Expense.

2.Converting Liabilities into Revenue

A business may collect cash in advance for services to be rendered in future accounting periods. Transaction of this nature is usually recorded by debiting Cash and by crediting a liability account may be called Unearned Revenue.

Here the liability account created represents the deferral of a revenue.

In the period that services are actually rendered an adjusting entry is made to allocate a portion a of the liability to the income. By recognize the revenue earned during the period.

Here adjusted entry recorded by debiting the Liability and crediting Revenue Earned for the value of services.

3. Accuring Unpaid Expenses

Expenses may be incurred in current accounting period even though no cash payment will occur until future period. These accrued expenses are recorded by an adjusting entry made at the end of each accounting period. The adjusting entry is recorded by debiting the appropriate account and crediting the related liability.

Normally in all business salaries are paid at the start of months so here salaries are earned by employees, this is business expense and expense is still payable so it will be recorded as liability.

4. Accruing Uncollected Revenue

Revenue may be earned during the current period, even though the collection of cash will occur until a future period. Unrecorded earned revenue, for which no cash has been received, requires an adjusting entry at the end of the accounting period. The adjusting entry is recorded by Debiting the appropriate asset account and by crediting the appropriate revenue account.