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What are adjusting entries?

Author:
Harold Averkamp, CPA, MBA

Definition of Adjusting Entries

Adjusting entries are usually made on the last day of an accounting period (year, quarter, month) so that a company’s financial statements comply with the accrual method of accounting. In other words, the adjusting entries are needed so that a company’s:

  • Income statement reports the revenues that have been earned during the accounting period
  • Balance sheet reports the receivables that it has a right to receive as of the end of the accounting period
  • Income statement reports the expenses and losses that were incurred during the accounting period
  • Balance sheet reports the liabilities it has incurred as of the end of the accounting period

Examples of Adjusting Entries

Here are a few examples of the need for adjusting entries:

  • A company shipped goods on credit, but the company’s sales invoice was not processed as of the end of the accounting period
  • A company received some goods from a vendor but the vendor’s invoice had not been processed by the company as of the end of the accounting period
  • A company that prepares monthly income statements paid for 6 months of insurance coverage in the first month of the insurance coverage. (This means that 5/6 of the payment is a prepaid asset and only 1/6 of the payment should be reported as an expense on each of the monthly income statements.)
  • A company’s customer paid in advance for services to be provided over several accounting periods. Until the services are provided, the unearned amount is reported as a liability. After the services are provided, an entry is needed to reduce the liability and to report the revenues.

Note that a common characteristic of every adjusting entry will involve at least one income statement account and at least one balance sheet account.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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