Adjusting Entries | Push Digits Chartered Accountants

Adjusting Entries

These type of adjusting entries are usually made at the end of a reporting period to record revenues which have been earned but have not been entered in the accounting records, and expenses that have been incurred but are yet to be recorded in the accounting ledgers.

Adjusting entries are basically used for converting an entity’s accounting records to the accrual basis of accounting. An entity makes adjusting entries to its accounting records prior to issuing its financial statements.

Adjusting entries are commonly used by entities to record the following:

  • Amortization and depreciation
  • Impairment of an asset
  • Allowance for doubtful debts
  • Warranty reserve
  • Reserve for sale returns
  • Accrued revenue

When you record a deferral, accrual, or estimate journal entry, it usually impacts a liability or asset account. For example, if an entity accrues an expense, this also increases the entity’s liability. If an entity defers recognition of its revenue to a later period, this also increases the entity’s liability. Therefore, it can be said that adjusting entries not only impacts the income statement of an entity but also its balance sheet.

Types of Adjusting Journal Entries

Adjusting entries are of three types which are as follows:

Accruals

Adjusting entries for accruals are used for recording income or expenditure that has been earned or incurred but are yet to be recorded in the entity’s accounting ledgers.

Deferrals

These are adjusting entries that are used for deferring income/ expenditure that has been recorded but is yet to be earned or used.

Estimates

These entries involve the recording of an estimate such as reserve for obsolete inventory or allowance for doubtful debts.

Reversing Entries

As we all know most of the adjusting entries which an entity makes in its accounting ledgers involve deferrals and accruals so it is necessary for an entity to set up these adjusting entries as reversing entries if its accounting system allows. This means that the accounting system/ software automatically generates an entry opposite to the adjusting entry at the start of the next financial year. By doing so the entity is able to eliminate the impact of an adjusting entry in case the accounting records are viewed over two financial periods.

Best Practices to Follow for Recording Adjusting Entries

An entity should evaluate its accounts at the end of each financial period for potential adjustments. All the adjusting entries which an entity is required to make in its accounting records should be mentioned in the entity’s closing checklist. The entity should also make a template for an adjusting journal entry in its accounting software which can be repeated so there is no need to construct that entry each month.

Examples of Adjusting Journal Entries

Example 1:

ABC Company records $3,000 allowance for doubtful debts. The entry for the above-mentioned transaction is as follows:

Account Head Debit $ Credit $
Bad debts expense 3,000
Allowance for doubtful debts 3,000

Example 2:

ABC Company records a $5,000 depreciation associated with its non – current assets during a specific accounting period. The entry for the above-mentioned transaction is as follows:

Account Head Debit $ Credit $
Depreciation expense 5,000
Accumulated depreciation 5,000

Example 3:

ABC Company records accrue revenue of $13,000 which has been earned but is yet to be billed by the entity. The entry for the above-mentioned transaction is as follows:

Account Head

Debit $

Credit $
Trade debtors 13,000
Revenue 13,000
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