the adjusting process

• An entry in a company's general ledger called an Adjusting journal entries are made at the end of an accounting period to record unrecognized income or expenses for that period
• Adjusting journal entries are needed to appropriately account for a transaction that spans across multiple accounting periods
• Adjusting journal entries can also correct errors made during the accounting period
• Revenues and expenses must be reported in the proper period according to the Accounting Period Concept
• Adjusting journal entries convert cash transactions into the accrual accounting method to recognize revenue when it is earned
• An adjusting journal entry includes an income statement account (revenue or expense) and a balance sheet account (asset or liability)
• Types of adjusting entries:

  • Accrued revenues: revenue generated but not recognized later
  • Accrued expenses: expenses generated but paid for later
  • Deferred revenues: revenue paid in advance
  • Prepaid expenses: one-time advance payment for expenses
  • Depreciation expenses: cost spread out over multiple accounting periods for assets
• Adjusted trial balance is prepared after adjusting entries have been made in all accounts to bring financial statements into conformity with accounting frameworks
• Adjusted trial balance verifies the equality of total debit and credit balances before preparing financial statements
• An adjusted trial balance is an internal report serving two purposes rather than being a part of the financial statements:

  • To ensure that the sum of all debit balances and credit balances in all accounts is the same; and

  • To be used in creating financial statements