Adjusting Journal Entry Details

Adjusting journal entries are made in the general ledger of a company at the end of an accounting period. A general ledger is record-keeping system companies use to document financial transactions (using debit and credit) that hold information necessary to report financial statements. At some point, companies may make transactions during the current period, but it won’t completely settle until a later period, e.g. taking a loan or selling goods in credit. To properly take into account these transactions, the bookkeeper needs to make an adjusting journal entry.

Even though some -- if not all -- of the cash related to the transactions has not changed hands, bookkeepers still need to record each of the transactions accordingly following the matching principle. The matching principle requires companies to report any income or expense in the way it initially earned, not waiting until payment is fully paid or received. Adjusting journal entries also affect some accounts listed on the income statement and balance sheet reported at the end of an accounting period. Some examples of these accounts include supplies expenses and interest expenses on the income statement, as well as accrued expenses, accrued income, and deferred expenses on the balance sheet.

Whether they are accruals or deferrals, these transactions may happen at this period, but they will not finish until the next accounting period. Adjusting journal entries are there to deal with potential misinterpretation of the company’s true revenues and expenses amount as the related cash may not immediately be received or paid. Bookkeepers may also make an adjusting journal entry to make corrections on mistakes from a previous accounting period.

Example of Adjusting Journal Entry

XYZ Company is a firm that adopts the accrual accounting method to record transactions. This means that the firm recognizes a transaction immediately after it occurs rather than when payment is received or made.

In mid-December, when the fiscal year of the company almost reaches its end, XYZ Company orders office supplies from a supplier in credit. It is a short-term loan where the firm expects to be able to pay the debt by January 31st of next year, which is the beginning month of the next fiscal year. This means that the firm accrues the debt payment until the end of January with no cash expended during the current period. That said, the bookkeeper still needs to make an adjusting journal entry to properly account for this transaction.

The bookkeeper needs to put the appropriate debit and credit entries on supplies into the general ledger. Coincidentally, the company also plans to report the yearly financial statements for this year at the start of January next year. In that case, the income statement and balance sheet need to also take into consideration the unpaid expense. Normally, there should be a debit on accrued expense and credit on accounts payable.

Types of Adjusting Journal Entry

So far, we’ve only covered one type of adjusting journal entry in the form of accrual, which is earned income or expense but not yet paid. In reality, however, there are other conditions in which bookkeepers need to make adjusting entries. The most common types of adjusting journal entries are as follows:

Accruals: accumulated revenue or expense that has been earned while cash exchange has not fully taken place.

Deferrals: advance payments a company pays or receives for goods or services that have not yet been delivered, e.g., prepaid electricity bills and insurance premiums. In a way, this is the opposite of accruals.

Estimates: recorded estimations on items whose true value can’t be easily determined, such as depreciation. Estimates usually cover non-cash items that are still essential for the company.

No matter which one of the events above happens, bookkeepers or accountants need to make adjustments to the ledger or financial statements so that they can present a more accurate representation of the company’s financial condition.