Step 2 – Adjusting Entries

Difficulty level: Beginner

Approx reading time: 60

090414_1516_Theaccounti1.pngAdjust Accounts

Companies often record transactions when it is most convenient. The most convenient time to record transactions is when something of value is exchanged. For instance cash for product or accounts payable for inventory.

Sometimes there is no obvious direct connection between expenses and revenue. Accountants must exercise judgment to select the accounting period in which to recognize revenues and expenses.

Moreover, a single business transaction could pertain to more than one accounting period. To provide accurate financial reports businesses need to recognize expenses that affect the current accounting period but has not yet been entered in the books. For example, your next pay period might span 2 accounting periods, so the pay due in the current accounting period  needs to be recognized before the preparation of the year end financial statement.

There are 4 adjusting entries discussed in this unit namely:

  1. Adjusting for supplies expense
  2. Adjusting for rent expense
  3. Recognizing revenue earned
  4. Accruing salaries expense

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