Adjusting Entries: Matching Accounting

1
Adjusting EntriesMatching Accounting Timing

• Certain end-of-period adjustments must be made
  when you close your books.
• Adjusting entries are made at the end of an
  accounting period to account for items that don't
  get recorded in your daily transactions.
• In a traditional accounting system, adjusting
  entries are made in a general journal.
• Some adjusting entries are straightforward.
• Others require judgment and some accounting
  knowledge.

2
Adjusting EntriesMatching Accounting Timing

• Some adjusting entries must be made because there
  is a journal entry that drives it.
• Some adjusting entries must be made because of
  the passage of time there is no driver.
• Adjusting entries are used to insure that
  revenues are reported when earned and expenses
  are reported when incurred.

3
Adjusting EntriesMatching Accounting Timing

• Adjustments are necessary because applicable
  things have occurred during the period but have
  not been recorded.
• Any adjusting entry always increases either a
  revenue or an expense (not both in the same
  entry).
• Either a revenue will be receiving a credit or an
  expense will be receiving a debit.
• The only question for the journal entry then
  becomes What gets the debit (if the adjustment
  is to increase revenue) or what gets the credit
  (if the adjustment is to increase an expense)?

4
Adjusting EntriesMatching Accounting Timing

• Adjusting entries to increase revenues are
  required either because someone paid you before
  you did any work (unearned revenue) or you did
  work before you billed or were paid for it
  (accounts or interest receivable).
• This tells you your debit entry if the adjustment
  is to increase revenue debit unearned revenue
  or debit accounts (interest, etc.) receivable
  credit revenue (of some type).
• Remember a prepaid expense is an asset, NOT an
  expense.
• Remember an unearned revenue is a liability,
  NOT a revenue.

5
Adjusting EntriesMatching Accounting Timing

• Adjusting entries to increase expenses are
  required either because you already paid for them
  before using them (prepaid expenses such as
  insurance, rent, supplies) or you used them
  before being billed or paying for them (accrued
  wages payable, accrued interest payable, etc.).
• This tells you your credit entry if the
  adjustment is to increase an expense.
• Debit the expense credit prepaid insurance,
  supplies or wages payable, etc.

6
Closing Entries Out With The Old, In With The
New

• After financial statements are prepared, you are
  ready to get your books ready for the next
  accounting period by clearing out the income and
  expense accounts in the general ledger and
  transferring the net income (or loss) to your
  owner's equity account.
• Closing entries are needed to clear out your
  revenue and expense accounts as you start the
  beginning of a new accounting period.

7
Closing Entries Out With The Old, In With The
New

• Note the distinction between adjusting entries
  and closing entries.
• Adjusting entries are required to update certain
  accounts in your general ledger at the end of an
  accounting period.
• Adjusting entries must be done before you can
  prepare your financial statements and income tax
  return.
• Closing entries are done after the financial
  statement is constructed.

8
Closing Entries Out With The Old, In With The
New

• Preparing your closing entries is a very simple,
  mechanical process. Follow these steps
• Close the revenue accounts. Prepare one journal
  entry that debits all the revenue accounts.
  (These accounts will have a credit balance in the
  general ledger prior to the closing entry.)
  Credit an account called "income summary" for the
  total.
• Close the expense accounts. Prepare one journal
  entry that credits all the expense accounts.
  (These accounts will have a debit balance in the
  general ledger prior to the closing entry.) Debit
  the income summary account for the total.

9
Closing Entries Out With The Old, In With The
New

• Transfer the income summary balance to a capital
  account. Prepare a journal entry that clears out
  the income summary account. This entry
  effectively transfers the net income (or loss) of
  the business to the owner's equity account.
• Close the dividend account. If your business is a
  sole proprietorship or partnership, close the
  dividend accounts (if any) by preparing a journal
  entry that credits the dividend account and
  debits the owner's equity account.

10
Closing Entries Out With The Old, In With The
New

• After all closing entries are made, post the
  entry totals to the general ledger.
• All revenue and expense accounts should have a
  zero balance.