There comes a time in every business owner’s life when someone they know and respect professionally mentions the need for an adjusting journal entry. If you’re an experienced business person or took accounting classes in college, you might know what they’re talking about. But for the entrepreneurial neophyte, adjusting journal entries are something of a mystery.
Adjusting Journal Entries Defined
An adjusting journal entry is nothing more than an entry in a company’s general ledger that records unrecognized income or expenses for a specific period of time. In other words, adjusting journal entries are used to record income and expenses that haven’t happened yet. These entries are typically made at the end of an accounting period, for instance, the end of the month, quarter, or calendar year. Many companies operate on a fiscal year that’s different from the standard January through December calendar. In that case, adjusting journal entries would also be made at the end of the fiscal year.
Adjusting journal entries can also be used to fix mistakes. If a mistake was made and income or expenses were recorded incorrectly in a previous month, an adjusting journal entry can be recorded to move the income or expense back where it belongs.
Types of Adjusting Journal Entries
There are three common types of adjusting journal entries.
Accruals. Accruals refer to revenues and expenses that haven’t been received or paid yet and have not been recorded through a regular accounting transaction. To illustrate, an example of an accrued expense is rent that’s due at the end of the month. Even though the payment hasn’t been made yet, the company can still use the space all month.
Deferrals. Revenues and expenses received or paid in advance are called deferrals. They’ve been officially recorded in the general ledger but haven’t actually been used or earned yet. For example, money received for goods not yet delivered falls into the unearned revenue category and is recorded as a deferral.
Estimates. Estimates are adjusting journal entries that record non-cash items like depreciation of assets, uncollectible accounts, or inventory.
Why Use Adjusting Journal Entries?
In the world of accounting, everything has to balance. Adjusting journal entries are used to keep the books balanced during times when regular business practices result in an out-of-balance situation. For example, many businesses function in a way where the delivery of goods occurs at a different time than the payment for those goods. This happens frequently with credit card payments and online purchases that require shipping. It’s quite common for an accounting period to end with such an unbalanced situation unresolved. In this case, an adjusting journal entry is made to reconcile the discrepancies in timing between payments and expenses. Without these adjustments, open transactions would remain on the books with no resolution. And your accountant would have questions for you.
A Good Accounting Team Can Help with Adjusting Journal Entries
Having a trusted accounting partner on the team is critical for business success, especially when it comes to things like adjusting journal entries and other accounting practices. Your accounting team will help you ensure that all revenues and expenses are properly recorded, office equipment is depreciated appropriately, travel expenses are categorized correctly, and your accounts payable and receivable are reconciled on a regular basis.
Adams Accounting Solutions can do all this and more. We specialize in small business accounting and tax preparation. In addition to helping you set up good accounting practices, we’ll make sure you’re following all federal tax guidelines and help you make the most of any tax deductions you’re eligible for.
If you have questions about accounting-related terms, including adjusting journal entries, give us a call. We’re always happy to help our clients gain a full understanding of the things that impact them and their business. Call or stop by today!
