Adjusting Entries Examples Step By Step Adjusting Journal Entries

Adjusting Entries Examples

Adjusting entries, also known as adjusting journal entries (AJE), are the entries made in a business firm’s accounting journals to adapt or update the revenues and expenses accounts according to the accrual principle and the matching concept of accounting. It is impossible to provide a complete set of examples that address every variation in every situation since there are hundreds of such Adjusting Entries. The article will discuss a series of examples to understand better the necessity of adjusting entries. The following Adjusting Entries examples outline the most common Adjusting Entries.

These accounting entries are recorded at the end of the accounting period after preparation of trial balancePreparation Of Trial BalanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more but before the preparation of financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more.At the end of an accounting period, some expenses and revenues may not have been recorded or updated according to accrual and matching principleMatching PrincipleThe Matching Principle of Accounting provides accounting guidance, stating that all expenses should be recognized in the income statement of the period in which the revenue related to that expense is earned. This means that, regardless of when the actual transaction is made, the expenses that are entered into the debit side of the accounts should have a corresponding credit entry in the same period.read more. If necessary adjustments are not made, various accounts, including revenue, expenditure, assets, and liabilities, will fail to reflect accurate and fair values

Top 3 Examples of Adjusting Entries

Below are the examples of Adjusting Journal Entries.

Adjusting Entries Example #1 – Accrued but Unpaid Expenses

Mr. Jeff, an owner of a small furniture manufacturing company named Azon, offers A-Z varieties of furniture. Azon ends its accounting year on June 30. The company took a loan of $100,000 for one year from its bank on May 1, 2018, @ 10% PA, for which interest payments have to be made at the end of every quarter.

The company’s accountant needs to take care of this adjusting transaction before closing the accounting records for 2018.

Given:

Loan Amount: $100,000Interest amount @10 PA: $10,000Monthly Interest Payable: $833.332 months interest payable: 1667First interest payment due date: 31-Jul-18Accounting year end date: 31-Jun-18

As per accrual principal company needs to record all the incurred expenses, whether paid or not. The incurred expense will adjust the income statement and the balance sheet. The company incurredInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more interest expensesInterest ExpensesInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more from 1/5/2018 to 30/6/2018, i.e., for two months, and the remaining un-incurred and unpaid interest expenses will adjust in the next accounting periodNext Accounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance.read more.

The accrued interestAccrued InterestAccrued Interest is the unsettled interest amount which is either earned by the company or which is payable by the company within the same accounting period.read more payable account will increase the company’s liability because interest expense was incurred but remain unpaid, and an equal amount will increase the expenses of the income statement.

Adjusting Entries Example #2 – Prepaid Expenses

Mr. Jeff, an owner of Azon, wants to ensure the company’s inventory (or stock). On June 1, 2018, he purchased an insurance policy for a premium of $ 3000 for six months.

The accountant records the transaction of $3000 on 1/6/2018. The accounts need to be closed on 30/6/2018.

The entry for insurance reflects six months’ expenses, which have been paid, but coverage of only one month could have been used by June end.

As per the accrual principle, only 1-month expenses can be adjusted against the income statement, and the remaining paid balance will increase the balance sheet’s assets as prepaid insurancePrepaid InsurancePrepaid Insurance is the unexpired amount of insurance premium paid by the company in an accounting period. This portion of unexpired insurance is an asset and will be shown in the balance sheet of the company.read more. The journal entry will be:-

Adjusting Entries Example #3

Jack owns a fast-growing retail store chain in China named Baba, headquartered in Hong Kong. Being in the business for more than two decades, it has started making its presence nationwide and has made a good reputation amongst its major customer base.

Baba follows the same pattern as many commonwealth nations and closes its accounting year on 31st March.

The accountant of Baba records journal entry daily and post them to ledger accounts Baba’s accountant records journal entries daily and periodically posts them to ledger accounts. He prepares the unadjusted trial balanceUnadjusted Trial BalanceAn unadjusted trial balance is the account balances reported directly from the general ledger without adjusting for the year-end journal entries. It acts as a starting point for analyzing account balances and adjusting entries.read more for the year ending 31/3/20** as follows:-

The accountant of the company needs to take care of the following adjusting entries before closing its accounting records:-

Adjusting Entries are:-

The adjusted trial balanceAdjusted Trial BalanceAdjusted Trial Balance is a statement which incorporates all the relevant adjustments. Although it is not a part of financial statements, the adjusted balances are carried forward in the different reports that form part of financial statements. read more for the year ending 31/3/20** is as follows:-

Conclusion

A business needs to record the true and fair values of its expenses, revenues, assets, and liabilities. Adjusting entries follows the accrual principle of accounting and makes necessary adjustments that are not recorded during the previous accounting year. The adjusting journal entry generally takes place on the last day of the accounting year and majorly adjusts revenues and expenses.

Adjusting Entries are made after trial balances but before preparing annual financial statementsAnnual Financial StatementsAnnual Financial Statements refers to the annual presentation of the entity’s financial performance comprising a Balance Sheet, statement of profit and loss, statement of changes in equity, cash flow statement, and notes to the financial statements. It provides information to the stakeholders for making financial decisions about the business.read more. Thus these entries are very important for the representation of the accurate financial health of the company.