At the end of an accounting period, adjusting journal entries may be required when reviewing your financial records. Adjusting entries are usually essential for tracking revenues and expenses in case you did not receive or make payments at the point of sale. The journal entry you make when you make an advance payment for rent or insurance is one of the common adjusting entries examples.
In the following section, adjustment of journal entries examples, therefore, would include any journal entries made in a business’s accounting journals to adapt or update the revenues and expenses accounts according to the matching principle and accrual concept of accounting. Knowing when and how to do adjusting journal entries can help make sure you accurately record business transactions like deferrals, accruals, and depreciation. Hence, in this article, we explain what adjusting journal entries are with different adjusting entries examples.
Related: Adjusting entry for bad debt expense
What are adjusting entries?
Adjusting journal entries are entries made at the end of an accounting period to report any unrecognized income or expenses for the period. Such adjustments of journal entries are required to account for transactions that start in one accounting period but end in a later accounting period. These adjustments can also be done to correct a mistake made previously in the accounting period.
The whole concept of making adjusting entries is based on the revenue recognition principle that requires that revenue is recognized in the period in which it was earned and realized, regardless of when cash is received. Adjusting entries in accounting is, therefore, necessary because it enables you to record business transactions accurately in time by keeping track of your receivables and payables. If these adjustments are not made, the financial health of a business will be completely distorted on the financial statement. There will be an overstatement of the business’s net income and the owner’s equity, and the business’s expenses and liabilities will be understated.
See also: Adjusting entry for inventory
Adjusting entries examples and solutions
In accounting, there are several instances where adjusting entries are recorded. You record adjusting journal entries at the end of accounting periods for different types of adjusting entries such as accruals, deferrals, or depreciation. It is impossible to show all the sets of adjusting entries examples that address every variation of when these adjustments are made. Hence, we will only discuss a few adjusting journal entries examples in order for you to have a better understanding. Here are some of the most common adjusting entries examples and solutions you may likely come across in accounting:
Adjusting entries examples for when expenses are accrued
You make adjusting entries when you accrue expenses such as recurring bills, like utilities or payroll.
Accrued expenses (or accrued liabilities) are expenses incurred in an accounting period but paid for in the following accounting period. The adjusting entry for accrued salaries and accrued utilities is a typical example of adjusting journal entries.
For example, ABC Company worked in the office for the month of September and the amount of electricity used up equaled $12,000 for the month. The company records this unbilled electricity expense as:
|September 30||Electricity bill||$12,000|
On October 3, the company received the electricity bill and paid the electricity company on October 4. Here is an example of how to journalize adjusting entries for this:
|October 2||Accrued expenses||$12,000|
Adjusting journal entries examples for when revenue is accrued
Adjusting entries are required when you earn money for providing products or services to customers but haven’t invoiced the customer and hence receive payment at a later date. This is reported as accrued revenue and is usually common with services and interest accrual. For instance, a service provider renders a service worth $5,000 to a customer in November but is yet to send the invoice to the customer. This is how the service provider will record this unbilled revenue in his books for the month of November:
|November 30||Accrued revenue||$5,000|
On December 1, the service provider sends the invoice to the customer and receives payment on December 2. Here is an example of how the journalizing adjusting entries for this would look like:
Example of adjusting journal entries for prepaid expenses
Adjusting entries are required when a business pays for a product or service in advance. This is recorded in the books as deferred expenses or prepaid expenses. This is usually common with prepaid rent, prepaid insurance, and advertising. For instance, assume your lease for an office space officially starts January 1 but in December you made an advance payment of $1,200 which is a year’s worth of rent. Here is how you would record this in your books:
|December 1||Prepaid rent||$1,200|
By the end of January, when you have used up 1/12 of the prepaid rent, you then record the rent expense for the month. That is, you make an adjusting entry by transferring the used portion of the prepaid rent in January to an expense account. Journalizing adjusting entries is done every month until the entire prepaid rent has been used up:
|January 31||Rent expense||$100|
Accounting adjusting entries examples for unearned revenue
You make adjusting entries when revenue is deferred; that is when you receive payment for a product or service that you’re yet to deliver to a customer. This is recorded in the books as deferred revenue or unearned revenue. This sort of transaction is usually common in subscription models or service contracts. For example, a contractor signed an agreement to build a shed for a homeowner. The contractor schedule the work to begin on August 10 but requires a down payment of $1,000 before the work begins. Hence, the homeowner pays $1000 on July 31. Here is how the contractor will record this unearned revenue in his books:
After the work is completed, the contractor has fully earned the revenue and so an adjusting entry for unearned revenue is made to his books. That is:
|August 31||Deferred revenue||$1,000|
Example of adjusting journal entries for depreciation
When reporting depreciation expenses, adjusting entries are required. Reporting depreciation in accounting is when you make a one-time payment to account for the loss in value of a fixed asset. Depreciation is calculated by subtracting the original value of an asset from its current value. In order to record this, you divide this amount by the number of months that the asset has been used. The adjusting journal entry for depreciation expenses is definitely one of the common examples of adjusting entries.
For instance, ABC company purchased a new car for $20,000 and after using the car for years, the car’s value decreases by $3,000. The company when filing its tax return pays a one-time $3,000 fee and submits adjusted entries of $250 for depreciation, each month for the tax year. The adjusting entries for this would look like this: