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| Corporate Practice bd |
What are Adjusting Entries? Definition, Types, and Examples
Adjusting entries are made at the end of an accounting period to update accounts and ensure accuracy in financial reporting. They are necessary because some transactions may span multiple periods or involve estimates that need to be recognized properly. Here are the types of adjusting entries commonly used:
Accruals:
Accrued Revenues:
Revenue earned but not yet received or recorded. Example: Interest earned but not yet received.
Accrued Expenses:
Expenses incurred but not yet paid or recorded. Example: Salaries expense incurred but not paid.
Deferrals:
Deferred Revenues (Unearned Revenues):
Revenue received in advance but not yet earned.
Example:
Subscription revenue received in advance.
Deferred Expenses (Prepaid Expenses):
Expenses paid in advance but not yet incurred. Example: Prepaid insurance or rent.
Depreciation:
Allocating the cost of long-term assets (like buildings or equipment) over their useful lives.
Adjustment for Bad Debts:
Writing off or adjusting the allowance for doubtful accounts based on estimates of un-collectible accounts receivable.
Accrual of Interest:
Recording interest expense incurred but not yet paid, or interest revenue earned but not yet received.
Adjustment for Inventory:
Adjusting the value of inventory for any obsolescence, damage, or changes in market value.
Income Tax Provision:
Making adjustments for income taxes owed based on current year's income.
Adjusting entries are crucial to ensure that financial statements reflect the true economic status of a business at the end of an accounting period. They are typically prepared by accountants and are essential for accurate financial reporting and compliance with accounting principles (e.g., GAAP or IFRS).