Adjusting Entries

Adjusting Entries

Necessity of adjusting entries

Adjusting entries are those entries, which are made at the end of the closing accounting period of the company; such entries are made to adjust the balances of the accounts. The company always makes adjusting entries at the end of the accounting period of the company and before the making of the financial statements. An adjustment, which is done through the adjusting entries, ensures that the company's financial records are made according to the matching principles given by the accounting standards. Such entries are very crucial as a single transaction may impacts (positively or negatively) on the records of the company and affects the further consecutive years (Adjusting, 2010).

The effective use of such entries makes easy for the company to report their financial position (balance sheet), which includes the reporting of assets, liabilities and owner's equity of the company appropriately. Adjusting entries also helps in the reporting of financial performance (income statement) of the company, through calculating the accurate net profit of the company.

Adjusting entries are the need for every organization at every time. The main aim of the adjusting entries is to report and close the accounts of the company according to the standards of accrual base accounting systems to report the accounts of the company accurately to the tax authorities (Bulmash, 1999).

Types of adjusting entries

Following are the types of adjusting entries.

Accrued revenues

Accrued revenues are also known as accrued assets. Accrued revenues are such revenues, which are already earn but are not pay by the client yet. Due to this, they are not record in the general ledger. The concept of accrued revenue will understood through an example, suppose a company who manufactures custom build machines, sold its product to one of its customer via sea route. It would take time to ...