Adjusting entries are part of the general accounting cycle. This is done at the end of the accounting period to adjust the expenses and revenues of a company and make the credit and debit columns in the accounting ledger balanced. Adjusting entries are not based on when payments have been paid or received, but the actual time these payments should apply, which in turn will create a balance between expenses and revenues. Adjusting entries include accrued revenues and expenses, unearned revenues, prepaid expenses and depreciation. These entries are made after a trial balance has been prepared. Once the adjusting entries have been done these are recorded in the general accounting ledger. Here are the things you should do to prepare adjusting entries.
- In the normal business operating cycle, balance of accounts receivable and payable within an accounting cycle is not feasible because there are accrued expenses that can span several accounting cycles. For example the company is paying insurance premiums. These can be paid now but in reality, the payment will be over the succeeding months. The same can also be applied to accounts receivable. The company may have received a payment, or partial payment for a product or service that should be recorded either for the previous month or the succeeding month/s. So in order for you to create adjusting entries, these records should be available. These can be accrued depreciation of assets, amortization schedule, debt and interest payments, and accounts collectible. Make sure that you keep all these records intact and in separate files.
- Make a trial balance for the accounting period based on the entries that you have on the ledgers. This will give you an initial view of what needs adjustment so you can refer to the documents and records that you have.
- Locate all the records that will cover the accounting period and make a list of all the entries that should be adjusted. Label them properly so that you can make the entries as error-free as possible. Proceed to create the adjusting entries. For example the company has done a service for a client this month and the bill will be sent out next month. This is accrued revenue since the payment or earning should be entered in the month when the service was performed. If the payment will be received in another month, your debit column should show the accounts receivable and your credit column should reflect the fee earned.
- Do the same for the rest of the earnings and expenses for the accounting period. If the company has been paid in full for a service that will be completed in several months, the unearned revenue for the succeeding months should be in the debit column and the credit column should reflect the revenue.
- Enter projected salaries as salary expense in the debit column and written as salaries payable in the credit column. If, let us say you are paying for an insurance premium on a quarterly basis and you have already paid one half of the total package at the end of the accounting period, it means that your company still has six months to pay. To make the adjusting entry for prepaid expenses, place the amount as casualty and property expense in the debit column and enter it as prepaid insurance in the credit column.
Preparing the adjusting entries this way will help you to properly segregate the company’s payables and receivables and turn these into real time expenses and earnings. You can then post these adjusting entries into the general accounting ledger and create a new adjusted trial balance. You can now easily spot errors in the entries and make corresponding adjustments. Keeping records efficiently and filing documents correctly are essential in making all your accounting entries and adjusting entries accurate.