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The Basics of Adjusting Entries


Explain the reasons for adjusting entries and identify the major types of adjusting entries.
In order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred,
companies make adjusting entries. Adjusting entries ensure that the revenue recognition and expense recognition principles are followed.
Adjusting entries are necessary because the trial balance—the first pulling together of the transaction data—may not contain up-to-date and complete data. This is true
for several reasons:
1.
Some events are not recorded daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by employees.
2.
Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily
transactions. Examples are charges related to the use of buildings and equipment, rent, and insurance.
3.
Some items may be unrecorded. An example is a utility service bill that will not be received until the next accounting period.
Adjusting entries are required every time a company prepares financial statements. The company analyzes each account in the trial balance to determine whether it is
complete and up to date for financial statement purposes. Every adjusting entry will include one income statement account and one balance sheet account.
International Note
Internal controls are a system of checks and balances designed to detect and prevent fraud and errors. The Sarbanes-Oxley Act requires U.S. companies to enhance their
systems of internal control. However, many foreign companies do not have to meet strict internal control requirements. Some U.S. companies believe that this gives
foreign firms an unfair advantage because developing and maintaining internal controls can be very expensive.
Types of Adjusting Entries
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