Adjusting Entries

Adjusting entries are journal entries recorded at the end of an accounting period to adjust income and expense accounts so that they comply with the accrual concept of accounting. Their main purpose is to match incomes and expenses to appropriate accounting periods.

The transactions which are recorded using adjusting entries are not spontaneous but are spread over a period of time. Not all journal entries recorded at the end of an accounting period are adjusting entries. For example, an entry to record a purchase on the last day of a period is not an adjusting entry. An adjusting entry always involves either income or expense account.

Types

There are following types of adjusting entries:

Example

This example is a continuation of the accounting cycle problem we have been working on. In the previous step we prepared an unadjusted trial balance. Here we will pass adjusting entries.

Relevant information for the preparation of adjusting entries of Company A
Office supplies having original cost $4,320 were unused till the end of the period. Office supplies having original cost of $22,800 are shown on unadjusted trial balance.
Prepaid rent of $36,000 was paid for the months January, February and March.
The equipment costing $80,000 has useful life of 5 years and its estimated salvage value is $14,000. Depreciation is provided using the straight line depreciation method.
The interest rate on $20,000 note payable is 9%. Accrue the interest for one month.
$3,000 worth of service has been provided to the customer who paid advance amount of $4,000.

The adjusting entries of Company A are:

DateAccountDebitCredit
Jan 31Supplies Expense18,480
Office Supplies18,480
Supplies Expense = $22,800 − $4,320 = $18,480
Jan 31Rent Expense12,000
Prepaid Rent12,000
Rent Expense = $36,000 ÷ 3 = $12,000
Jan 31Depreciation Expense1,100
Accumulated Depreciation1,100
Depreciation Expense = ($80,000 − $14,000) ÷ (5 × 12) = $1,100
Jan 31Interest Expense150
Interest Payable150
Interest Expense = $20,000 × (9% ÷ 12) = $150
Jan 31Unearned Revenue3,000
Service Revenue3,000

An adjusted trial balance is prepared in the next step of accounting cycle.

Written by Irfanullah Jan