Question

What do you understand by adjusting entries? Give examples.

Answer 1

Adjusting entries are usually made on the last day of an accounting period (year, quarter, month) so that the financial statements reflect the revenues that have been earned and the expenses that were incurred during the accounting period.

An adjusting entries is an adjustment recorded at the end of an accounting period to asset or liability account and related expense or income to record business events that occurred in the period but were not recorded.

Example

1) Depreciation is good example of non cash activity where expenses are matched with revenues. when a company purchases a vehicle , a car isn't immediately expensed because it will be used over many accounting periods. instead it is capitalized and reported on the balance sheet. At the end of each accounting period adjusting entries is made to record the current years vehicle cost allocation by debiting depreciation expense and crediting accumulated depreciation.

2)Mr X electricity bill was $ 200 and is due January 15th

Dec 31 Dr Utility expense    200

   Cr Accrued expenses 200

Narration : To record accrued expenses.

3) Mr x 's employee works half a pay period, so X accrues $500 of wages

Dec 31    Dr wages expense    500

Cr Accrued expenses    500

Narration : To record pay roll accrual for amount owed employees.