Accounting Adjusting Entries

Adjusting entries are recorded usually after transactions, which occurred during a particular month, were journalized and posted from general journal to general ledger, certain accounting data and facts are still not accounted for. This is done at the end of each period recording accounting adjusted entries, when such data is fully available and all facts are known.

Usually period end adjusting entries are related to the following accounting data and facts:

1. Calculation and accounting for depreciation of fixed assets

Usually when fixed assets are acquired, the company intends to use in the activities them for the period longer that one year. Therefore the cost value of these assets is included into the balance sheet of the company. As the assets are being used, their value decreases and such decrease must be included into the expenses. Each item of the fixed asset has useful life during which the asset can be used, therefore cost value of the asset must be included into the expenses in equal parts during that useful life. For example: the company on June 1, 2007 acquires furniture, which has useful life of 4 years. Cost value of the furniture is 4800$. During June only the following general journal entry would be done: D Furniture 4800$ C Cash or Accounts payable (if not paid by cash) 4800$ At the end of June it is necessary to account for the depreciation of furniture. Monthly depreciation amount is calculated as follows: 4800$/4 years=1200$ - annual depreciation amount. 1200$/12 months=100$ - monthly depreciation amount. To account for depreciation the following general journal adjusting entry is made: D Expenses 100$ C Accumulated depreciation (furniture) 100$ Please not that for depreciation purposes separate account is used, i.e. furniture cost value is not directly decreased, but is accounted for in the contrary account – accumulated depreciation, which balance is always on credit side thus decreasing the value of the assets. Posting this transaction into general ledger can be depicted by posting into T accounts:

2. Estimation of current assets (stationery, office supplies) consumed and accounting for consumption

Usually during a current period (for example - month) the company in its activities consumes certain stationery and office supplies. At the end of period cost value of such items consumed is estimated and included into the expenses, decreasing value of stationery or office supplies. Example: assume that during a particular month the company consumed office supplies, cost value of which is 500$. The following general journal entry is done: D Expenses 500$ C Office supplies 500$ Posting this transaction into general ledger can be depicted by posting into T accounts (please note that T accounts include only this particular transaction, without information on the opening balances and other transactions posted into the accounts):

3. Estimation of prepaid expenses (insurance, subscription) amount used during the period

In case the company pays for certain expenses in advance, i.e. usually insurance and subscription is paid in advance, the amounts paid are accounted for as assets and at the end of the period only actual amount of expenses incurred is included into the expenses. For example: on June 1 the company paid in advance for insurance, amount 3000$, insurance period is 6 months. General journal entry to account for prepaid insurance was as follows: D Prepaid expenses 3000$ C Cash 3000$ At the end of June it is necessary to estimate actual amount of insurance expenses incurred, i.e. 1 month passed and 1/6 of the insurance amount (3000/6=500$) to be included into the expenses. General journal entry is: D Expenses 500$ C Prepaid expenses 500$ Posting this transaction into general ledger can be depicted by posting into T accounts (please note that T accounts include only this particular transaction, without information on the opening balances and other transactions posted into the accounts):

4. Accounting for additional expenses incurred for the period

Usually at the end of month not all the invoices for particular long-term services are received, i.e. for telecommunication services, utilities, and these invoices are received within first days of the next month. However as the amount of such expenses is know, it must be accrued (accounted for) in that particular period in order to follow the matching principle. For example, invoice for utilities services provided in June, was received on 3rd of July, value of services is 320$. To account for this transaction the following general journal entry to be made: D Expenses 320$ C Accrued expenses 320$ Posting this transaction into general ledger can be depicted by posting into T accounts (please note that T accounts include only this particular transaction, without information on the opening balances and other transactions posted into the accounts):

5. Accounting for additional income earned for the period

Also at the end of period certain income can be earned, but not yet invoices issued. Such income must be included into the income of that period in which they were earned. For example: in June the company provided services for 120$, however the invoice was issued only in the beginning of July. To account for this income, the following general journal entry to be made: D Accrued income (assets) 120$ C Income (owners’ equity) 120$ Accrued income is accounted under assets side, as after the invoice will be issued the company will have a right to claim cash from the customers. Posting this transaction into general ledger can be depicted by posting into T accounts (please note that T accounts include only this particular transaction, without information on the opening balances and other transactions posted into the accounts):