Adjusting Journal Entry

MoneyBestPal Team
A type of accounting transaction that is made at the end of an accounting period to update the balances of certain accounts.

An adjusting journal entry is a type of accounting transaction that is made at the end of an accounting period to update the balances of certain accounts. 

Both the income statement and the balance sheet are impacted by adjusting journal entries, which are typically entered in the general ledger.

Adjusting journal entries is done to make sure that the accrual basis of accounting, in which revenues are recognized as they are earned and expenses are matched with revenues, is reflected in the financial statements. Any mistakes or omissions that may have happened during the accounting period are also fixed by adjusting journal entries.

There are four types of adjusting journal entries: accruals, deferrals, estimates, and reclassifications.
  1. Accruals are entries that list income or expenses that have been incurred but not yet paid or received. For instance, if a business offers customer services in December but does not receive payment until January, it must record an accrual entry for the income generated in December.
  2. Deferrals are entries that list income or costs that have been paid or received ahead of time but haven't yet been earned or incurred. A corporation must record a deferral entry for the expense of prepaid rent in December, for instance, if it pays the rent six months in advance in December.
  3. Estimates are entries that reflect income or expenses based on calculations or estimates rather than real transactions. For instance, if a business predicts that its bad debt charge for the year would be $10,000, it must record an anticipated entry for the expense at the end of the year.
  4. Reclassifications are entries that move an account from one category to another in its classification. A corporation must make a reclassification item for the inventory and supplies accounts, for example, if a portion of its inventory is reclassified as supplies.

Adjusting journal entries are essential for preparing accurate and reliable financial statements. They make sure the accounts accurately depict the company's actual economic activities and financial situation. Additionally, they support adherence to the rules and guidelines for accounting that control financial reporting.