Accounting is the Backbone of every business. No business can survive without a strong Accounting Team. I am sure many of you would agree when I say Accounting can make a business or break a business. I say so because it is the Accounting records which depict the true position of the company and it is very important for the business to follow right accounting practices to provide true and correct information to its stakeholders.

 

Most of the times companies fail to record important transactions due to which the businesses fail miserably. So it is very critical for every business to follow complete accounting in order to avoid flaws in regards to accruals by passing Adjusting entries.

 

Adjusting entries are journal entries which are passed at the end of an accounting period to adjust income and expense accounts. Their main objective of Adjusting entries is to match incomes and expenses to appropriate accounting periods and to fulfil the Matching principle.

 

The transactions which are recorded using adjusting entries are spread over a period of time. Not all journal entries recorded at the end of an accounting period are adjusting entries but an adjusting entry always involves either income or expense account.

 

The Adjusting entries can be classified into 3 types. They are

  • Accruals:
    These include revenues not yet received nor recorded and expenses not yet paid nor recorded. For example, interest expense on loan accrued in the current period but not yet paid.
  • Prepayments:
    These are revenues received in advance and recorded as liabilities, to be recorded as revenue and expenses paid in advance and recorded as assets, to be recorded as expense. For example, adjustments to unearned revenue, prepaid insurance, office supplies, prepaid rent, etc.
  • Non-cash:
    These adjusting entries record non-cash items such as depreciation expense, allowance for doubtful debts etc.