adjusting entries

• An adjusting journal entry is an entry in a company's general ledger that occurs at the end of an accounting period to record any unrecognized income or expenses for the period.
• When a transaction is started in one accounting period and ended in a later period, an adjusting journal entry is required to properly account for the transaction.
• Adjusting journal entries can also refer to financial reporting that corrects a mistake made previously in the accounting period.
• Adjusting journal entries are used to record transactions that have occurred but have not yet been appropriately recorded in accordance with the accrual method of accounting.
• Adjusting journal entries are recorded in a company's general ledger at the end of an accounting period to abide by the matching and revenue recognition principles.
• The most common types of adjusting journal entries are accruals, deferrals, and estimates.
• It is used for accrual accounting purposes when one accounting period transitions to the next.
• Companies that use cash accounting do not need to make adjusting journal entries.
• The purpose of adjusting entries is to convert cash transactions into the accrual accounting method.
• Accrual accounting is based on the revenue recognition principle that seeks to recognize revenue in the period in which it was earned, rather than the period in which cash is received.
• An adjusting journal entry involves an income statement account (revenue or expense) along with a balance sheet account (asset or liability).
• Companies that use accrual accounting and find themselves in a position where one accounting period transitions to the next must see if any open transactions exist.
• Reconciliation is an accounting procedure that compares two sets of records to check that the figures are correct and in agreement.
• Accrued revenue—an asset on the balance sheet—is revenue that has been earned but for which no cash has been received.
• Adjusting journal entries are payments or expenses that do not occur at the same time as delivery.
• A prepaid expense is an asset on a balance sheet that results from a business making advanced payments for goods or services to be received in the future.
• Cash accounting recognizes expenses and revenues only when money is received for goods or services, while accrual accounting allows for a lag between payment and product, such as with purchases made on credit.
• Accrued interest refers to the interest that has been incurred on a loan or other financial obligation but has not yet been paid out.
• Accruals refer to payments or expenses on credit that are still owed, while deferrals refer to prepayments where the products have not yet been delivered.
• Accruals are revenues earned or expenses incurred that impact a company's net income, although cash has not yet exchanged hands.
• The accounting cycle is a process of recording, analyzing, adjusting, finalizing, and reporting a company's accounting activities for an accounting period.
• Adjusting journal entries typically relate to the balance sheet accounts for accumulated depreciation, allowance for doubtful accounts, accrued expenses, accrued income, prepaid expenses, deferred revenue, and unearned revenue.
• The company is set to release its year-end financial statements in January, so an adjusting entry is needed to reflect the accrued interest expense for December.
• Not all journal entries recorded at the end of an accounting period are adjusting entries.
• Without adjusting entries to the journal, there would remain unresolved transactions that are yet to close.
• The company’s first interest payment is due March 1, but it needs to accrue interest expenses for the months of December, January, and February.
• The adjusting entry will debit interest expense and credit interest payable for the amount of interest from December 1 to December 31.
• Income statement accounts that may need to be adjusted include interest expense, insurance expense, depreciation expense, and revenue.
• The entries are made in accordance with the matching principle to match expenses to the related revenue in the same accounting period.
• Adjusting journal entries are used to reconcile differences in the timing of payments as well as expenses.
• An example of an adjusting journal entry is a company that takes out a loan from the bank on December 1 with interest payments due every three months.
• The adjustments made in journal entries are carried over to the general ledger that flows through to the financial statements.
• Deferrals refer to revenues and expenses that have been received or paid in advance, respectively, and have been recorded, but have not yet been earned or used.
• Accruals are revenues and expenses that have not been received or paid, respectively, and have not yet been recorded through a standard accounting transaction.
• An entry to record a purchase of equipment on the last day of an accounting period is not an adjusting entry.
• Estimates are adjusting entries that record non-cash items, such as depreciation expense, allowance for doubtful accounts, or the inventory obsolescence reserve.
• Adjusting journal entries are most commonly accruals, deferrals, and estimates.
• Adjusting journal entries are used to reconcile transactions that have not yet closed, but which straddle accounting periods.