Adjusting entries

Definition

Adjusting entries are journal entries made at the end of an accounting period to update account balances before financial statements are prepared. They ensure that revenues and expenses are recorded in the period they occur, in accordance with the matching principle.

5 Must Know Facts For Your Next Test

1. Adjusting entries are necessary to align financial records with the accrual basis of accounting.
2. There are four main types of adjusting entries: accrued revenues, accrued expenses, deferred revenues, and deferred expenses.
3. Adjusting entries typically involve one balance sheet account and one income statement account.
4. Without adjusting entries, financial statements may be inaccurate or misleading.
5. Common examples include recording earned but unbilled revenue or recognizing prepaid expenses as they are used.

Review Questions

• What is the main purpose of adjusting entries?
• Name the four main types of adjusting entries.
• Why is it important to make adjusting entries before preparing financial statements?

Related terms

Accrued Revenues: Revenues that have been earned but not yet recorded in the accounts.

Deferred Expenses: Costs that have been paid but not yet incurred as an expense; also known as prepaid expenses.

Matching Principle: An accounting principle that dictates that expenses should be matched with revenues in the period they are incurred.