What is an Adjusting Journal Entry?

An adjusting journal entry is an entry in a company’s general ledger that occurs at the end of an accounting period to record any unrecognized income or expenses for the period.

Adjusting entries are recorded in a company’s general ledger at the end of an accounting period to abide by the matching and revenue recognition principles.

The most common types of adjusting journal entries are accruals, deferrals, and estimates.

Adjusting journal entries help make a business’s account balances more accurate and useful.

What is a Journal Entry?

For definition, please go here: Journal entry.

Preparation

An adjusting journal entry is usually prepared monthly or at the end of the year.

Inventory

An inventory adjusting journal entry is used to update the inventory account’s balance to reflect the correct value of remaining inventory that the company owns.

This adjustment is typically made at the end of an accounting period, often after a physical inventory count.

There are two types of adjusting entries: one to increase inventory and one to decrease inventory.

The entry to increase inventory involves debiting the inventory account and crediting the cost of goods sold, while the entry to decrease inventory involves debiting the cost of goods sold and crediting the inventory account.

Debit: Merchandise Inventory        $2,000
Credit:     Cost of Goods Sold                $2,000

Needed – Adjusting Journal Entry

Adjusting journal entries are needed to ensure that a company’s financial records are accurate and complete, and to prepare financial statements in accordance with the accrual accounting method.

These entries are used to record transactions that have occurred but have not yet been appropriately recorded, and to correct any mistakes made in the accounting period.

They are necessary to update all account balances before financial statements can be prepared, and they help provide a more accurate picture of a company’s financial position.

Adjusting entries are important for reconciling revenue and expenses and for managing a company’s financial performance.

Accruals and Adjustments

An accrual adjusting journal entry is an entry in a company’s general ledger that occurs at the end of an accounting period to record any unrecognized income or expenses for the period.

These adjusting entries are essential for converting cash transactions into the accrual accounting method, which is based on the revenue and expense recognition principles.

The most common types of adjusting journal entries are accruals, deferrals, and estimates.

Accrual adjusting entries are also related to the balance sheet accounts for accumulated depreciation, allowance for doubtful accounts, accrued expenses, accrued income, prepaid expenses, deferred revenue, and unearned revenue.

They ensure that the part of a transaction that has occurred during a particular month appears on that same month’s financial statements.

Debit: Rent Expense             $3,000
Credit:         Accrued Rent            $3,000

Supplies

A supplies adjusting journal entry is made to reflect the actual amount of supplies used during a specific period.

This entry is necessary to ensure that the supplies expense is accurately recorded on the income statement and that the supplies account on the balance sheet is not overstated or understated.

The entry typically involves debiting the supplies expense account and crediting the supplies account to reflect the reduction in the value of the supplies.

Let’s say the beginning balance in the supplies account is $5,000 and $4,000 of supplies are on hand, the adjusting entry would involve debiting the supplies expense account for $1,000 and crediting the supplies account for the same amount.

Debit: Supplies Expense            $1,000
Credit:       Supplies Inventory           $1,000

Work in Progress

A work-in-progress (WIP) adjusting journal entry is a record used in accounting to reflect the value of partially completed goods or services on a company’s balance sheet.

It is used to account for the costs of materials, processes, and labor that have been incurred but have not yet been completed.

The journal entry typically increases the value of assets on the balance sheet and may also impact the liability.

An example of a WIP adjusting journal entry is a debit to the work-in-progress account and a credit to the accounts payable or liability account.

This entry helps ensure that the company’s financial statements accurately reflect the value of work that is in progress but not yet completed.

Debit: Work in Progress - Building            $1,000,000
Credit:       Accounts Payable - Contractor                $1,000,000                 

Notes Payable and Interest Expense

Notes payable adjusting entries are journal entries made in accounting records to account for the accruing interest on long-term debts, such as notes payable, which are loans or other forms of debt expected to be paid off more than one year into the future.

These adjusting entries are made monthly to keep records current and show the correct amount of interest owed.

Let’s say an accrual of interest on a $10,000, 6%, 1-year note.

At the end of the first month, the company would record an adjusting entry by debiting Interest Expense for $50 ([$10,000 x 6%] x 1/12) and crediting Interest Payable for $50 to reflect the interest owed but not yet paid.

This entry ensures that the company’s financial records accurately reflect the interest expense for the period and the interest payable on the note.

Debit: Interest Expense            $50
Credit:        Interest Payable            $50

Bad Debts

A bad debts adjusting entry is an accounting entry made to record the estimated uncollectible portion of accounts receivable.

This entry is necessary to adhere to the matching principle in accounting, which requires expenses to be recognized in the same period as the related revenues.

There are two main methods for estimating bad debts: the percentage of sales method and the accounts receivable aging method.

The adjusting entry for bad debts typically involves debiting the bad debts expense account and crediting the allowance for doubtful accounts account.

This entry allows the company to report a more accurate amount of accounts receivable on the balance sheet and a more realistic amount of bad debts expense on the income statement.

Debit: Bad Debts Expense             $5,000
Credit:      Allowance for Bad Debts         $5,000

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