handout 4

• 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
  • Accrued expenses
  • Deferred revenues
  • Prepaid expenses
  • Depreciation expenses
• Accrued revenue adjustment is made when revenue is generated in one period but not recognized later
• Accrued expense adjustments account for expenses generated in one period but paid for later
• Deferred revenue is when a client pays in advance and must be recorded in the period the service is performed
• Prepaid expenses work similarly to deferred revenue, where a one-time advance payment is recorded as an expense for the applicable period
• Depreciation expenses involve spreading the cost of an asset over multiple accounting periods
• An adjusted trial balance is prepared after adjusting entries have been made in all accounts to correct errors and bring financial statements into conformity with accounting frameworks
• The adjusted trial balance verifies the equality of total debit and credit balances before preparing financial statements