Yahnsea Belleza Alfaro - BSAM II

October 14, 2019

ACCTG – 1

ADJUSTMENTS
Adjusting entries are made in your accounting journals at the end of an accounting period after a
trial balance is prepared. The purpose of adjusting entries is to adjust revenues and expenses to
the accounting period in which they occurred. After the entries are made in the accounting
journals, they are posted to the general ledger in the same way as any other accounting journal
entry.

We will sort the adjusting entries into five categories:

• Accrued Revenues - Under the accrual method of accounting, a business needs to report all of
the revenues (and related receivables) that it has earned during an accounting period.
• Accrued Expenses - The financial statements of a business must report all of the expenses (and
related payables) that it has incurred during an accounting period.
• Deferred Revenues - The amounts received in advance of being earned must be deferred to a
liability account until they are earned.
• Deferred Expenses - Any payments for future expenses must be deferred to an asset account
until the expenses are used up or have expired.
• Depreciation Expense - Depreciation allocates the asset's cost (minus any expected salvage
value) to expense in the accounting periods in which the asset is used.

Steps for Recording Adjusting Entries

• You must identify the two or more accounts involved.
1. One of the accounts will be a balance sheet account.
2. The other account will be an income statement account.
• You must calculate the amounts for the adjusting entries.
• You will enter both of the accounts and the adjustment in the general journal.
• You must designate which account will be debited and which will be credited.

The Adjusting Process

• Describe the nature of the adjusting process.
• Journalize entries for accounts requiring adjustment.
• Summarize the adjustment process.
• Prepare an adjusted trial balance.
Purpose of Adjusting Entries
The main purpose of adjusting entries is to update the accounts to conform with the accrual
concept. At the end of the accounting period, some income and expenses may have not been
recorded, taken up or updated; hence, there is a need to update the accounts. If adjusting entries
are not prepared, some income, expense, asset, and liability accounts may not reflect their true
values when reported in the financial statements. For this reason, adjusting entries are necessary.
Composition of entries affect at least one nominal account and one real account. A nominal
account is an account whose balance is measured from period to period. Nominal accounts
include all accounts in the Income Statement, plus owner's withdrawal. They are also called
temporary accounts or income statement accounts.

Examples of nominal accounts are:

• Service Revenue
• Salaries Expense
• Rent Expense
• Utilities Expense
• Mr. Gray Drawing, etc.

A real account has a balance that is measured cumulatively, rather than from period to period.
Real accounts include all accounts in the balance sheet. They are also called permanent accounts
or balance sheet accounts.

Real accounts include:

• Cash
• Accounts Receivable
• Rent Receivable
• Accounts Payable
• Mr. Gray Capital, and others

All adjusting entries include at least a nominal account and a real account. Note: "Adjusting
entries" refer to the 6 entries mentioned above. However, in some branches of accounting
(especially auditing), the term adjusting entries could refer to any entry that aims to adjust
incorrect account balances.

As a result, there is little distinction between "adjusting entries" and "correcting entries" today.
In the traditional sense, however, adjusting entries are those made at the end of the period to take
up accruals, deferrals, prepayments, depreciation and allowances.