The adjustments made in journal entries are carried over to the general ledger that flows through to the financial statements. These entries bring corporate financial statements into compliance with the matching and revenue recognition principles. They are a necessary part of the accrual accounting process and a very important part of the accounting cycle. Accruals are estimates that a company makes for unbilled revenues or expenses that were incurred in one accounting period but billed and paid for in a subsequent accounting period.
On January 9, the company received $4,000 from a customer for printing services to be performed. The company recorded this as a liability because it received payment without providing the service. Assume that as of January 31 some of the printing services have been provided. Since a portion of the service was provided, a change to unearned revenue should occur. The company needs to correct this balance in the Unearned Revenue account.
What is an Adjusting Journal Entry?
This can be done by looking at the unadjusted trial balance, which is the third step in the accounting cycle. If the proper channels of communication are not in place, the likelihood of accounting errors is large. Once the accountant has all of the information necessary to prepare the required adjustments, they must create the journal entries and post them to the appropriate accounts. Once the adjustments are made, an adjusted trial balance must be produced and evaluated for accuracy. The SEC is a government body with the authority to establish reporting and disclosure requirements for public companies. Adjusting Entries are part of the accrual accounting process thus companies that follow a cash-basis accounting process do not need to make adjusting entries at the end of the accounting period.
Both principles are important to review when discussing adjusting entries. The differences between accrual and cash accounting will be discussed later. The most common method used to adjust non-cash expenses in business is depreciation. The adjusting entry in this case is made to convert the receivable into revenue. Following our year-end example of Paul’s Guitar Shop, Inc., we can see that his unadjusted trial balance needs to be adjusted for the following events.
Example of an Adjusting Journal Entry
Accrual accounting is the process of making adjustments to ensure that revenue is recognized during the accounting period in which it is earned and expenses are reported in the time period they were incurred. The Accounting Cycle is a roughly 8-step process by adjusting entries examples which financial information is recorded and reported to internal and external users in a company. Accrued revenues are revenues that have been earned during an accounting period but have not yet been recorded in the books, nor has the cash been received.
