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Other Adjustments

Adjusting entries are journal entries that are made to comply with the accrual basis of accounting. These entries are made to include those expenses incurred or revenues earned in the current accounting period but have been inadvertently overlooked. They must be included in the income statement and balance sheet of the current period in which they occurred whether paid or received or not.

Adjusting entries also have to be made to apportion those expenses and revenues that affect more than one accounting period. Each adjusting entry made involves one income statement account (revenue or expense account) and one balance sheet account (asset or liability account). The entries are made at the end of the accounting period, usually after the trial balance is prepared and before finalizing the financial statements. It is possible that some items have not been included in the trial balance, thus the adjusting entries.

These are the types of adjusting entries:

  • Accrued expenses (or accrued liabilities): These are expenses incurred but not yet paid.
  • Accrued revenues: These are revenues earned but not yet received.
  • Prepaid expenses: These are payments made in advance for future expenses.
  • Unearned revenues (or deferred revenues): There are revenues received but not yet earned, and thus become liabilities on the financial statements.
  • Depreciation of fixed assets.
  • Provision/Allowance for bad debts and discounts
  • Inventory adjustments

It helps to take a closer look at the closing balances in the income statement and on the balance sheet to ensure none of them is out of the ordinary. For example, has the closing stock figure on the balance sheet been subjected to verification like a physical count? Have those expenses incurred but have yet to be paid or revenues earned but not yet received been included in the final accounts? This is important as all balance sheet account balances are carried forward to the next accounting period. Any wrong closing balances will also be brought forward. The closing account balances that are charged to the income statement are not brought forward to the next period, but their accuracy or otherwise does affect the net profit.

If more expenses incurred in a period are paid within the period, and more revenues earned are received in the same period, the lesser will be the adjusting journal entries.