Explaining Adjusting Entries
In accountancy, adjusting entries can be explained as journal entries which are made generally at the closing of an accounting period to apportion income and expenditure to the period in which they occurred actually. Putting it other way, adjusting entries are generally recorded after transactions which have occurred during a specific month, were journalized and posted from but have not yet been accounted for. This is done at the closing stages of each period when such data and all facts are fully on hand.
Data and Facts related to Adjusting Entries
1. Calculation and accounting for depreciation of fixed assets
Generally, when fixed assets are acquired, the company aims at using them in the activities for the period. The cost of these assets is, therefore, included in the company’s balance sheet. With regular use of these assets, their value falls down and this downfall must be recorded as expense.
2. Estimation of current assets consumed and accounting for consumption
Usually, certain stationary and office supply is consumed by the company during a current period in its activities. At the end of the period, the cost value of such items is estimated and counted into the expenses, thus decreasing the value of stationary or office supplies.
3. Estimation of prepaid expenses amount used during the period
There might be certain cases wherein the company pays in advance for a certain expense, like insurance and subscription. These amounts are recorded as assets and only the actual amount of expense incurred is included into the expenses at the end of the period.
4. Accounting for additional expenses incurred for the period
Generally, all the invoices for specific long-term services are not received at the end of month, like utilities and telecommunication services. These invoices received during the first days of next month. However, it is important to account for these expenses in that particular period for the amount of such expenses is known.
5. Accounting for additional income earned for the period
At the end of a period, there might be certain earned income but no invoices issued. Such income must be counted into that period’s income in which they were earned.