Accounting is a complex process, to say the least. It has been around since the birth of business and is constantly evolving.
Back in the day, accounting processes were purely manual; accountants recorded the financial activity of a business in dedicated ledgers - or journals. This is where the term comes from. As such, journal entries are simply records of a transaction in your business, entered as soon as they happen.
Journal entries reflect the amount, origin, destination, and nature of funds that travel through your business. Adjusting an entry implies that you are updating the status of a previously recorded transaction.
Learn everything about adjusting journal entries through this blog.
Journal entries are a record of transactions right at the time they happen. But they do not reflect that there was an actual exchange of payment at that very moment.
For example, when you raise an invoice for the services you render and send it to a client, you record this transaction as accounts receivable: however, these funds haven't yet been received.
When the client completes the reimbursement and you finally receive the due, you then proceed to adjust the previous journal entry by creating a new line of record stating that the money has been received.
This saves you the hassle of turning a million pages in the ledger trying to find one entry to modify. It is easier to enter a new record amending the old one, both identified by a unique reference number that closes the loop on a transaction.
In the olden times, this double-entry method enabled accountants to match the bottom line figures down to the last digit at the end of accounting cycles. Today, adjusting entries is mostly handled by accounting software.
To draw up an accurate financial picture of your business, the end numbers should match. Since all your income must tally with the expense, you need to maintain accurate journal entries and adjust them regularly.
It would be a disaster if your statements reflected revenue that hasn't been credited yet or an expense that was never incurred. These discrepancies are a result of forgetting to adjust journal entries.
Inaccuracy in the financial statement of your business works to distort the economic picture of your firm. So if you want to make informed investment and budgeting decisions, having your accounts reflect the right numbers is important.
Punctual adjustments keep the books balanced and allow you to reap the benefits of tax deductions.
To answer this question, you need to assess the tools and methods you employ for bookkeeping.
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To generate an accurately balanced journal, it's necessary to correctly categorize your expenses. Let's look at five ways of adjusting entries with examples.
This type of entry reflects your anticipated income. It is done to close the balance sheet at the end of the month in order to not reflect any income as dues.
Suppose your company manufactures notebooks. A client places an order worth $1,000 in August, but the payment doesn't come around until late September. To fulfill the order, your company incurs expenses against no income reflected in the journal. However, this creates an imbalance in the books.
So, you move an equivalent sum from the accrued receivables into the revenues section of the journal for August, making an adjusting entry. When the payment is received in September, this sum is finally moved into the cash section, reflecting the final receipt of compensation, thus closing the loop.
The concept of accrued expense is similar to accrued revenue. It refers to accounting for operating expenses examples that have been initiated but haven't been paid for yet.
Let's look at the previous example again to understand this concept.
To deliver the order of $1,000 worth of notebooks, you employ the services of a logistics company for an agreed fee of $100 in August. However, your logistics partner doesn't raise an invoice with you until early September despite performing the delivery.
Regardless, the logistics expense still needs to be recorded in your August accounts as expense accrued. It can later be adjusted to cash paid in September once debited from your business account post the invoice from the logistics partner.
This field goes in your account books with the compensation you receive in advance of your services. If a client pays you in full or part before you have delivered your products or services, you enter this sum into the deferred revenues section. This field reflects revenue that is yet to be justified.
Let's assume that your client agrees to pay you $400 in advance for the $1,000 order in August. This sum would be entered in a separate section of the journal as deferred revenue because you have been paid without rendering a service or selling a product yet.
When you do deliver the complete order and receive the remainder of the contract value, this sum can be adjusted to the 'income' field in your accounts.
Much like revenue deferred, prepaid expenses are anticipatory future expenses that you pay upfront now and adjust later as they actually occur.
So let's assume that you rent a warehouse for the whole year in August to store your notebooks and pay the total rent in one deposit. This expense is recorded in your books as expenses prepaid, in a bulk amount.
When September comes, you adjust the rental amount of one month in your journal to reflect that the monthly rent anticipated has finally been paid. In this way, by the end of the year, the entire prepaid expense would have been accounted for.
This is a complicated one. When you purchase high-value tangible assets that help you run your business smoother (for example, machinery), you segment up the cost of equipment and show it in your sheets over multiple accounting periods.
These accumulated depreciation costs allow you to get tax benefits and derive better value from your assets. However, it is best that a professional bookkeeper handle these entries, given their complex nature.
Accounting journals are the first steps a business takes towards generating a trustworthy, reliable financial statement at the end of the accounting term. A good set of cross-checked, tallied numbers helps you make better decisions concerning your money.
When it comes to adjusting journal entries, professional data entry is your best bet. A reliable bookkeeping service like Fincent can handle your journal entries so you can focus on growing your small business.
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