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By Ana Orwel
While exploring accounting terminology quite often we can find the term adjusting entry is being used. Sometimes it might be confusing to understand the essence of such term and its practical application. This article will help you to explore adjusting entries and understand when they are necessary and how to record them.
The Essence
Each transaction which occurred during the accounting period and which had an impact on the financial position of the business has to be recorded in the accounting books and first step for making such a record is a general journal. From the general journal entries are being posted to the accounts of general ledger and at the end of the accounting period the balances in the accounts are summarized and trial balance sheet is prepared. This is a short and quick overview of the procedures which are being done during the accounting period. Here we are talking about the transactions which occurred during the particular accounting period. However it might happen that certain transactions which occurred during prior accounting period will have an impact on current period and even on several periods in the future. Since such transactions were already accounted for, performing only usual procedures to record current period transactions will not allow us to reflect impact of past transactions on current accounting data.
Therefore adjusting entries are needed. Adjusting entries are made at the end of the accounting period and are aimed to record additional financial data which has an impact on the financial position of the business during the current period. Past period transactions which might impact future periods can be acquisition of fixed assets which are being used by the business for quite long period of time and the depreciation of such assets, consumption of office supplies or other inventory which was acquired earlier, consumption of certain services which were acquired earlier and other.
Practical Examples
One of the most the most frequent reasons for the adjusting entry is calculation of depreciation. Assume that the company for cash at the end of September acquired equipment, cost of which was $4000 and useful life is 5 years, straight line depreciation method is applied to calculate depreciation. In September the following journal entry was made:
D Equipment $4000
___C Cash $4000
At the end of October the adjusting entry to record the depreciation will have to be accounted for, i.e. $67 ($4000/5 years/12 months) monthly depreciation expenses will have to be recorded by the following entry:
D Expenses $67
___C Accumulated depreciation of equipment $67
While performing usual accounting procedures, which do not include recording of adjusting entries, depreciation expenses would not be accounted for.
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