Accounting Adjusting Entries
Study guide, definitions & examples
Adjusting Entries
According to the matching principle in accounting, adjusting entries are needed at the
conclusion of each fiscal period to align the revenues and expenses to the "correct"
period. Accruals and deferrals are the two main categories of altering journal entries.
Before financial statements are published, adjusting entries are recorded.
Accruals - Earned money or incurred costs that haven't yet been recorded
Deferrals - Asset receipts or cash payments made before recognizing
income or expenses
Example of Adjusting Entries
ABC Company took out a loan from a bank on December 1, 2021. The first interest
payment is to be made on June 30, 2022, and the company is preparing its financial
statements for the year ending December 31, 2021.
In this example, although the interest payment is due on June 30 of the following year,
the company must accrue the interest expense for the month of December and include
that value even though the charge was not actually paid in order to accurately reflect the
company's financial situation (i.e., an exchange in cash).
The accrual basis of accounting is the type of accounting used in this situation.
According to the accrual basis of accounting, costs are matched with relevant revenues
and recorded when they are incurred rather than when money exchanges hands.
Therefore, due to the matching principle in accounting, adjusting entries are necessary.
Adjusting journal entry for the ABC Company on December 31, 2021, would be:
DR Interest expense xxx
CR Interest payable xxx
Following the entries above the correct amount of interest expense and liability will be
recorded proportioned to the one month accrued.
Study guide, definitions & examples
Adjusting Entries
According to the matching principle in accounting, adjusting entries are needed at the
conclusion of each fiscal period to align the revenues and expenses to the "correct"
period. Accruals and deferrals are the two main categories of altering journal entries.
Before financial statements are published, adjusting entries are recorded.
Accruals - Earned money or incurred costs that haven't yet been recorded
Deferrals - Asset receipts or cash payments made before recognizing
income or expenses
Example of Adjusting Entries
ABC Company took out a loan from a bank on December 1, 2021. The first interest
payment is to be made on June 30, 2022, and the company is preparing its financial
statements for the year ending December 31, 2021.
In this example, although the interest payment is due on June 30 of the following year,
the company must accrue the interest expense for the month of December and include
that value even though the charge was not actually paid in order to accurately reflect the
company's financial situation (i.e., an exchange in cash).
The accrual basis of accounting is the type of accounting used in this situation.
According to the accrual basis of accounting, costs are matched with relevant revenues
and recorded when they are incurred rather than when money exchanges hands.
Therefore, due to the matching principle in accounting, adjusting entries are necessary.
Adjusting journal entry for the ABC Company on December 31, 2021, would be:
DR Interest expense xxx
CR Interest payable xxx
Following the entries above the correct amount of interest expense and liability will be
recorded proportioned to the one month accrued.
