Adjusting Entries

For the last quarter in bookkeeping, we discussed about adjusting entries for the merchandising business.

According to Investopedia (n.d.), adjusting entries are financial reporting that are usually prepared at the end of an accounting period to record any unrecognized income or expenses for the period. Adjusting entries can be prepared in two different accounting methods – the accrual basis accounting and cash basis accounting. The accrual basis accounting is an accounting method wherein revenues are reported on the income statement when they are earned. Under the accrual basis accounting, expenses are matched with related revenues and/or are reported when the expense occurs, not when the cash is paid (AccountingCoach, n.d.). Cash basis accounting is an accounting method that records transactions for revenue expenses only when the corresponding cash is received or payments are made (AccountingTools, n.d.).

Adjusting entries are necessary because a single transaction may affect revenues or expenses in more than one accounting period and also because all transactions have not necessarily been documented during the period (Cliffsnotes, 2016). They are made to ensure that the financial records adhere the revenue recognition principle and matching principle. According to AccountingTools (n.d.), the revenue recognition principle states that, under the accrual basis of accounting, revenue can only be recorded when an entity has substantially completed a revenue generation process; thus, revenue will be recorded when it is already earned. The matching principle requires that revenues and any related expenses be recognized together in the same period. Thus, if there is a cause-and-effect relationship between revenue and the expenses, record them at the same time. If there is no such relationship, then charge the cost to expense at once.

There are four types of adjustments – prepayments, unearned sales, depreciation and bad debts. Prepayments are expenses paid in cash and recorded as assets prior to being used. Unearned sales are revenues received in cash and recorded as liabilities prior to being earned. Depreciation is the periodic, systematic expiration of the cost of all fixed assets except land. Bad debts involve uncollectible accounts.

For more information, you can also consult these websites.

This website explains what adjusting entries are. It also provides detailed explanation on adjusting assets, liabilities, accruals and others. (URL source: https://www.accountingcoach.com/adjusting-entries/explanation)

This website provides information about adjusting entries for merchandise business. It will help especially bookkeeping students who are having difficulty in preparing this document. (URL source: https://courses.lumenlearning.com/finaccounting/chapter/adjusting-entries-for-a-merchandising-company/)

This site also provides an introduction about adjusting entries. It also provided an example of adjusting entries that can guide bookkeeping students in doing their task. (URL source: http://www.accountingverse.com/accounting-basics/adjusting-entries-introduction.html)

This video is particularly about the whole accounting cycle. It is somehow the summary of all the documents that a bookkeeper prepares and it includes adjusting entries. (URL source: http://www.investopedia.com/video/play/accounting-cycle/)

In summary, adjusting entries are usually made at the end of an accounting period. It is prepared to record unrecognized income or expenses during that particular period. It also adheres the accrual basis accounting and cash basis accounting and it must follow the revenue recognition principle and matching principle. There are also four types of adjustments namely prepayments, unearned sales, depreciation and bad debts. Adjusting entries are needed to record the appropriate assets, liabilities and owner’s equity in the balance sheet and to report the net profit or net loss in the income statement over the period.

In this lesson, I noticed that there is no difference in preparing the adjustments for the service and merchandising businesses. I just got confused at first because I already forgot our lesson on adjustments last year but my handouts and notes were a big help to me. Also, I seek help to my classmates whenever I am having difficulty and we’re helping each other. Adjusting entries are very important because it allows us to see a more accurate record of the company’s finances during an accounting period. It also allows the owner of the business see every transactions that happened during that time. If the adjusting entries are not prepared, there can be misinterpretations about the finances of the company.

References:

AccountingCoach. (n.d.). What is accrual basis of accounting? Retrieved April

21, 2017 from https://www.accountingcoach.com/blog/acrrual-basis-

accounting

AccountingTools. (n.d.). Cash Basis Definition. Retrieved April 21, 2017 from www.accountingtools.com/definition-cash-basis

AccountingTools. (n.d.). The Matching Principle. Retrieved April 21, 2017 from http://www.accountingtools.com/matching-principle

AccountingTools. (n.d.). The Revenue Recognition Principle. Retrieved April 21, 2017 from http://www.accountingtools.com/revenue-recognition-

principle

Cliffsnotes. (2016). Adjusting Entries. Retrieved April 21, 2017 from

https://www.cliffsnotes.com/study-guides/accounting/accounting-

principles-i/adjustments-and-financial-statements/adjusting-entries

Investopedia. (n.d.). Adjusting Journal Entry. Retrieved April 21, 2017 from http://www.investopedia.com/terms/a/adjusting-journal-entry.asp

Prof Cram. (2007 July 25). Adjusting Entries in Accounting. Retrieved April 21, 2017 from http://college-cram.com/study/accounting/accounting-

cycle/adjusting-entries-in-accounting/