One day I was explaining to the owner of a small business that I would have to accrue for the shipping expenses associated with his company’s sales. Since the shipping company billed him on the 15th of each month for his shipments from the 16th of the previous month until the 15th of the current month, we needed to estimate the expense for the second half of the month. For example, when I was preparing his company’s November 30th balance sheet and its November income statement, we didn’t have the shipping expense for November 16 – 30. (He also let me know that during this 15-day period, the shipping expense would be higher than any other 15-day period due to holiday sales.)
He listened carefully as I explained the matching principle, accrual-type adjusting entries, and reversing entries. As soon as I had finished, he phoned the shipping company and asked that his billing period be changed to cover the calendar month. They were pleased to make the change.
Next, the owner called his bank and asked if the bank would be able to deduct the current month’s loan interest from the company’s checking account on the last day of each month. The bank was pleased to arrange for this procedure.
In less than 15 minutes, the owner eliminated the need for me to calculate/estimate the amounts for two adjusting entries every month. Soon, each month’s actual amounts would be arriving automatically.
