Adjusting entries serve to correctly represent all revenue earned and expenses incurred during a specific accounting period. They also help align the balance sheet according to the accounting equation A=L+E.

Adjusting entries are made at year-end to ensure that the financial statements comply with the accrual basis of accounting. This is essentially your "last call" to properly record the current year's revenues and expenses because they can't be recorded in the next year.

If you skip adjusting entries, your financial statements won't accurately depict the company's financial position. This could mislead everyone from management to investors, potentially leading to bad financial decisions.

Adjusting entries have a dual impact: they modify both the income statement and the balance sheet. For example, if you adjust for consumed supplies, the Supplies Expense on the income statement gets debited, while the Supplies asset account on the balance sheet gets credited for the same amount.

The four types of adjusting entries are: 1) Accrued Revenues, 2) Accrued Expenses, 3) Deferred Revenues, and 4) Deferred Expenses.

Accrued Revenue is revenue that has been earned but not yet recorded in the financial statements or received in cash.

Accrued Expense is an expense that has been incurred but not yet recorded in the financial statements or paid in cash.

Deferred Revenue is money received in advance for services or products that will be delivered in the future.

Deferred Expense is a prepaid expense or advance payment for a future benefit, such as insurance or rent.

Accounting information is reported at regular intervals (monthly, quarterly, annually) to facilitate decision making.

The Matching Principle dictates that expenses should be recognized in the same period as the revenues they help to generate.

A regular journal entry records transactions as they occur. An adjusting entry updates account balances to reflect revenues earned or expenses incurred but not yet recorded.

Adjusting entries are recorded via journal entries that include at least one income statement account and one balance sheet account.

Revenue should be recognized in the same period it is earned, regardless of when cash is received.

False. Revenue is recognized when the services are delivered, not necessarily when cash is received.

Expenses should be recorded in the same period that the cost has been incurred, and also “matched” to the revenues they help generate.

False. Expenses are recognized when the resources or services are used to generate revenue, not necessarily when cash is paid.

Revenue is recognized when earned and expenses are recognized when incurred, regardless of the timing of cash flows.

Revenue is recognized when cash is received and expenses are recognized when cash is paid.

Financial reports covering a one-year period.

Financial reports covering a period less than one year, often bi-annually, quarterly, or even monthly.

A 12-month period over which a company measures its financial performance, which may not coincide with the calendar year.

A fiscal year that ends when a company's activities are at their lowest point. For example, a retailer’s may elect for their natural business year to end in January: the end of peak sales surrounding the holidays.

A general ledger is the primary accounting record used to track all financial transactions of a business. It consists of individual accounts for each type of asset, liability, equity, revenue, and expense, and it includes all the posted journal entries to provide a complete financial overview.

A systematic process used by businesses to record and organize their financial transactions during an accounting period and to prepare their financial statements.

The first step is Transaction Analysis, which involves identifying the business transactions that have a monetary impact on the company. Then, these transactions are recorded as individual journal entries.

Journalizing is the process of recording transactions in the general journal in chronological order. This includes the date, accounts affected, and amounts to be debited or credited.

After Journalizing, the next step is Posting to Ledger. This involves transferring the journal entries to the appropriate ledger accounts.

The process is called "Posting.”

The left side shows the debits to an account, while the right side shows the credits. These values are directly tied to journal entries made earlier in the accounting cycle.

Posting to the Ledger is the process of transferring journal entries to individual ledger accounts, also known as T-accounts, to provide a detailed record of all changes in each account during the period.

After Posting to Ledger, an Unadjusted Trial Balance is prepared to list all accounts and their balances at a particular date, ensuring that total debits equal total credits.

A Trial Balance is a list of all accounts and their balances at a specific point, used to verify that the sum of debits equals the sum of credits.

Adjusting Entries are made at the end of the accounting period to update certain accounts like prepayments, accruals, and estimates, ensuring compliance with revenue recognition and matching principles.

After Adjusting Entries, an Adjusted Trial Balance is prepared to verify that total debits equal total credits after all adjustments.

An Adjusted Trial Balance is a list of all accounts and their final balances after all adjusting entries have been made.

Using the Adjusted Trial Balance, Financial Statements like the income statement, statement of retained earnings, and balance sheet are prepared.

Financial Statements are reports like the income statement, statement of retained earnings, balance sheet, and statement of cash flows that are prepared using the Adjusted Trial Balance.

After preparing Financial Statements, Closing Entries are made to transfer balances of temporary accounts to permanent equity accounts.

Closing Entries are journal entries made to transfer the balances of temporary accounts like revenues, expenses, and dividends, to a permanent equity account such as retained earnings.

The last step is the preparation of the Post-Closing Trial Balance to ensure all temporary accounts have a zero balance and are ready for the next accounting period.

A Post-Closing Trial Balance is a list of all accounts with their final balances after closing entries, ensuring that temporary accounts have zero balances and are ready for the next accounting period.

Contra accounts have balances that are opposite to the accounts they offset. For example, Accumulated Depreciation - Equipment offsets the Equipment account on the balance sheet.

Accumulated Depreciation is a contra asset account that accumulates depreciation expense over the life of an asset. It decreases the book value of the asset it is associated with.

Closing entries are journal entries made at the end of an accounting period to transfer temporary account balances to permanent accounts.

Permanent accounts are balance sheet accounts (A = L + E) whose balances carry over into the next accounting period.

Temporary accounts are income statement accounts (Revenues & Expenses) whose balances are reset to zero at the end of each accounting period.

The Income Summary Account is used during the closing process to summarize revenue and expense balances so they can be transferred to the Retained Earnings Account.

They occur immediately after the preparation of the unadjusted trial balance and just before the preparation of the adjusted trial balance and subsequent financial statements.

Previously recorded transactions where the recognition of revenues or expenses was deferred.

Prepaids, Supplies, Unearned Revenue, Depreciation

Cash is received or paid first in the "original journal entry", while revenue or expense is recognized later via an adjusting entry. This concept is best understand via examples!

The trick is to remember the pattern: CASH RECEIVED/PAID FIRST, REVENUE/EXPENSE RECOGNIZED LATER!

First, cash is received or paid via an original journal entry.

Second, the expense or revenue is recognized via an adjusting journal entry at the end of the period.

False. In Deferral Adjusting Entries, it is the recognition of expense or revenue, not cash receipt or payment, that is deferred to a later date.

The recognition of expense or revenue is deferred to later.

True. Prepaid expenses are considered assets until they are consumed or used up, at which point they become expenses through an adjusting entry.

Prepaid Expenses are costs paid in advance that will become expenses over time, whereas Deferred Revenue is revenue received in advance that will be earned over time. Both require deferral adjusting entries.

Supplies, Insurance, Rent, Advertising, Office Supplies, Legal Fees, Utility Deposits, Equipment Leases, etc are all examples of Prepaid Expenses.

Legal Fees may be paid in advance for services to be rendered over a period, often in the form an upfront retainer. As the services are provided, the prepaid amount is reduced, and an expense is recognized.

Utility Deposits are upfront payments to utility companies that secure future service. While not an expense, they are a form of prepayment that may either be returned or applied to future bills.

When leasing equipment, the first and last month's payments are often made upfront. These become expenses over the duration of the lease, aligning with the usage of the equipment.

Adjusting Prepaids is an example of a deferral adjusting entry. This is because you first purchase prepaid insurance (an asset) in your original entry. Later, at year end, you record an adjusting entry to recognize insurance expense for the amount that has been used or that has expired.

The balance decreases, as the value of consumed or used up prepaid asset is moved to the appropriate Expense account.

We debit Insurance Expense (+/-) to increase it to the record the amount of prepaid insurance used, ensuring the income statement is accurate.

We credit Prepaid Insurance (+/-) to decrease it to the correct remaining amount, ensuring the balance sheet is accurate.

Insurance premiums are often paid in advance for a coverage period. The cost of insurance is then recognized as an expense monthly or annually, depending on the length of the coverage period.

We debit Rent Expense (+/-) to increase it to the record the amount of prepaid rent used, ensuring the income statement is accurate.

We credit Prepaid Rent (+/-) to decrease it to the correct remaining amount, ensuring the balance sheet is accurate.

Rent is often paid at the beginning of the rental period but relates to a future period. As the month progresses, the prepaid portion decreases, and an expense is recognized.

We debit Advertising Expense (+/-) to increase it to the record the amount of prepaid insurance used, ensuring the income statement is accurate.

We credit Prepaid Advertising (+/-) to decrease it to the correct remaining amount, ensuring the balance sheet is accurate.

Advertising campaigns may require upfront payment but benefit the business over a period. The cost is expensed over the duration of the campaign, aligning the expense recognition with the period benefited.

Yes, Supplies function like Prepaid Expenses. Though "Prepaid" is not in the title, Supplies are initially recorded as assets and used over time. As they are consumed, an adjusting entry transfers the cost from asset to expense, similar to Prepaid Expenses.

Even though "Prepaid" isn't in the account title, Supplies function as a prepaid expense. You pay for them upfront and use them over time. The cost of Supplies is recognized as an expense only when they are consumed.

Similar to general Supplies, Office Supplies are paid for upfront and consumed over time. They become an expense only when actually used in business operations.

Adjusting Supplies is an example of a deferral adjusting entry. Initially, you purchase supplies, recording them as an asset (+/-). Later, at year end, an adjusting entry is made to record the "supplies used" as an expense.

We debit Supplies Expense to increase its balance, thereby accurately reflecting the cost of the supplies used during the period on the income statement.

We credit Supplies to decrease its balance to the correct remaining amount, ensuring that the balance sheet is accurate.

Adjusting Unearned Revenue is an example of a deferral adjusting entry. Initially, you collect cash in advance for services to provide later, recording this as a liability. Later on, at year end, the adjusting entry recognizes the unearned revenue that was "earned" during the period.

We debit Unearned Revenue to decrease it, thereby reflecting the portion of the "unearned revenue" service obligation that is no longer owed — because it has been "earned.”

We credit Revenue to increase its balance, ensuring that the income statement accurately portrays the revenue earned during the period.

Cash received in advance for services or goods that have not yet been delivered.

True. The adjusting entry transforms Unearned Revenue into Earned Revenue by crediting a Revenue account.

Recognizing' refers to the formal recording of revenue in the financial statements, typically via an adjusting entry. 'Realizing' refers to the actual receipt of cash. You can recognize revenue without realizing it, and vice versa.

Adjusting for Depreciation Expense is an example of a deferral adjusting entry. This is because you initially purchase an asset like equipment or a building. At each year end where we own these long term assets, an adjusting entry is made to allocate a portion of its cost over its useful life as an expense.

We debit Depreciation Expense to increase its balance, recording the cost of the asset that has been used up during the period.

We credit Accumulated Depreciation, a contra asset (-/+) to increase its balance, decreasing the book value of the asset on the balance sheet.

A contra-asset account is an account that decreases the value of an associated asset account, like equipment or buildings. In the case of Accumulated Depreciation, it lowers the book value of the asset on the balance sheet.

Depreciation is considered a non-cash expense because no actual cash transaction occurs when recording depreciation. Instead, the cost of an asset is allocated over its useful life.

True. For example, in an adjusting entry for Prepaid Expenses, the Prepaid Expenses account (a balance sheet account) is credited, and an Expense account (an income statement account) is debited.

They are usually made at the end of the accounting period to reflect the portion of Prepaid Expenses used, or Unearned Revenue earned, during that period.

In deferral adjusting entries, cash moves first and the recognition of revenue or expense follows. In accrual adjusting entries, the recognition of revenue or expense occurs first, and the cash movement happens later.

In accrual accounting, the financial impact of transactions is recognized when they occur, not necessarily when cash is exchanged.

The trick is to remember the pattern: REVENUE/EXPENSE RECOGNIZED FIRST, CASH RECEIVED/PAID LATER!

Unrecorded Revenue, Interest Revenue, Interest Expense, Wages Expense, Income Taxes, Sales Commissions, etc.

Accrued revenues represent the revenue that a company has earned from providing goods or services but hasn't billed or received cash for yet.

An entry is made debiting the Cash account and crediting the Receivable account.

Accrued wages represent salaries or wages that employees have earned for their work but haven't been paid yet.

An adjusting entry is made debiting the Wages Expense account and crediting Wages Payable.

When interest expense is incurred but not paid, an adjusting entry is made debiting Interest Expense and crediting Interest Payable.

Accrued taxes represent a company's tax liability that has been incurred but not yet paid to the tax authorities.

An adjusting entry is made by debiting Income Tax Expense and crediting Income Taxes Payable.

Accrued utilities represent a company's utility expenses that have been incurred but not yet paid.

An adjusting entry is made by debiting Utilities Expense and crediting Utilities Payable.

Accrued sales commission represents a company's commission expense that has been incurred but not yet paid to the salespersons.

An adjusting entry is made by debiting Sales Commission Expense and crediting Sales Commission Payable.

A trial balance is a financial report that lists the balances of all ledger accounts of a business at a specific point in time. It ensures that the total debits equal the total credits, demonstrating the consistency of all recorded transactions.

It lists all accounts (Assets = Liabilities + Equity, Revenues, Expenses, any contra accounts) and their current ending debit or credit balance derived from the T Accounts from the posting process.

It indicates that there was an error in your journal entries or during the posting process.

An unadjusted trial balance is prepared before any adjusting entries are made in the ledger accounts, while an adjusted trial balance is prepared after all adjusting entries have been made. The adjusted trial balance verifies that the total debits equal the total credits after adjustments.

Begin by creating a column listing all your accounts in order by type (Assets = Liabilities + Equity, Revenues, Expenses). Contra accounts should be nested next to the type of account they're contra to.

Understand Normal Balances. Enter the ending balance of each account in either the Debit or Credit column, based on its normal balance.

Check Your Work. What to do if total debits don't equal total credits? Identify the mistake and fix it! Check for missing accounts, wrong column entries (i.e. you put an account with a normal balance of debit in the credit column!), calculation errors, or errors in journal entries and posting processes.

Summarizing the financial activity of a business during an accounting period. This typically includes preparing the income statement, statement of retained earnings, balance sheet, and statement of cash flows. These statements are derived from the adjusted trial balance.

Closing entries are made at the end of an accounting period to reset the balances of temporary accounts (Revenues, Expenses, Dividends) to zero. The balances are transferred to a permanent equity account, usually Retained Earnings.

The acronym R.E.I.D can help you remember: Revenues, Expenses, Income Summary, and Dividends.

Revenue accounts are closed by debiting them to reduce their credit balance to zero. The total is then credited to the Income Summary account to balance the entry.

Expense accounts are closed by crediting them to reduce their debit balance to zero. The total is then debited to the Income Summary account to balance the entry.

The Income Summary account is a summarization of the Net Income or Net Loss for a given period. It includes entries from closing revenues and expenses.

In a Net Income scenario, debit the Income Summary account and credit the Retained Earnings account. The debit balance in Income Summary represents the Net Income for the period.

In a Net Loss scenario, credit the Income Summary account and debit the Retained Earnings account. The credit balance in Income Summary represents the Net Loss for the period.

Because Retained Earnings, an equity account (-/+), is increased by net income. Therefore, we need to credit Retained Earnings to reflect this increase in equity.

Because Retained Earnings, an equity account (-/+), is reduced by a net loss. Therefore, we need to debit Retained Earnings to reflect this reduction in equity.

A Classified Balance Sheet organizes a company's assets, liabilities, and equity into specific subcategories to make it easier to analyze and understand.

A Classified Balance Sheet organizes the fundamental accounting equation Assets = Liabilities + Equity into more detailed subcategories. For assets, you have Current Assets and Long-Term Assets, which further break down into Plant Assets, Long-Term Investments, and Intangible Assets. On the liabilities side, you have Current Liabilities and Long-Term Liabilities. Finally, you have the Equity section. This structure helps you analyze the company's financial position more easily.

Current assets are resources expected to be used or converted into cash within one year, such as cash, accounts receivable, and inventory.

Long-Term Assets, or non-current assets, are expected to provide value for more than one year and include tangible assets, intangible assets, and long-term investments.

Plant Assets are tangible assets like machinery and buildings used in business operations, with a useful life of more than one accounting period.

Long-term investments are assets like stocks, bonds, or real estate that a company intends to hold for more than a year.

Intangible Assets are non-physical assets like patents and trademarks that provide long-term value to a company.

Current Liabilities are obligations due within the next year or business cycle, like accounts payable and short-term loans.

Long-Term Liabilities are obligations due in more than one year, such as long-term loans and mortgages.

Equity is the remaining interest in assets after liabilities have been subtracted, including common stock, retained earnings, and other comprehensive income.

Profit Margin is calculated as (Net Income / Gross Revenue ) x 100, showing the percentage of revenue that turns into net profit.

ROA measures how effectively a company uses its assets to generate net income, calculated as Net Income / Total Assets.

ROE measures the profitability relative to shareholders' equity, calculated as Net Income / Shareholder's Equity.

Working Capital is a measure of a company's short-term financial health, calculated as Current Assets − Current Liabilities.

The Current Ratio is calculated as Current Assets / Current Liabilities, and it measures a company's ability to meet short-term obligations with short-term assets.

The Quick Ratio is a liquidity metric calculated as (Current Assets − Inventory) / Current Liabilities, and it measures a company's ability to cover short-term obligations using its most liquid assets.