Adjusting Entries in Accounting

Introduction to Adjusting Entries

• Purpose of Adjusting Entries:
  • Made at the end of an accounting period.
  • Used to record revenues in the period they are earned and expenses in the period they occur.
  • Aligns with revenue recognition and matching principles.

Trial Balance Review

• Example discussed: Smart Touch Learning's unadjusted trial balance as of Dec 31, Year 1.
• Accounts order: Assets, Liabilities, Equity.
• Total debits should equal total credits.
• The unadjusted trial balance may omit revenue and expense transactions.

Key Principles

• Revenue Recognition Principle: Determine if there are earned revenues yet to be recorded.
• Matching Principle: Check if there are expenses incurred that aren't journalized.

Example Provided

• Office Supplies:
  • Initial Purchase: $500 in November.
  • By Dec 31, estimate $100 of supplies remain.
  • Adjusting Entry Needed:
    • Decrease Office Supplies asset account.
    • Increase Office Supplies Expense.

Importance of Adjusting Entries

• Ensure accuracy of:
  • Net Income/Loss on the income statement.
  • Assets and Liabilities on the balance sheet.

Categories of Adjusting Entries

1. Deferrals:

   • Types of Deferrals:
     • Cash payment before expense is incurred.
     • Cash receipt before fulfilling contract obligation.
   • "Deferral" implies a delay in recording expenses or revenues after cash transactions.

2. Accruals:

   • Types of Accruals:
     • Expense recorded before cash is paid.
     • Revenue recorded before cash is received.

Upcoming Lessons Preview

• Detailed examples and recording of four types of adjusting entries:

  • Deferred Revenues
  • Deferred Expenses
  • Accrued Revenues
  • Accrued Expenses

• Stay tuned for practical examples and detailed recording processes in the next lessons.