Adjusting Entries
What are Adjusting Entries?
Adjusting entries are adjustments you need to make your accounts at period-end to improve reporting accuracy.
![ae1](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae1-1.jpg)
How it Works
During the accounting period, you record transactions in income and expense accounts.
![ae2](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae2-1.jpg)
Then, at period end, you prepare reports.
![ae3](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae3-1.jpg)
Before doing this, though, you may need to make some adjustments to your accounts.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae4.jpg)
Unreported Income
By period-end, your accounts may be missing income.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae5.jpg)
For example, the business may enter a consulting contract with a client during the period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae6.jpg)
The contract may start during the current period.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae7.jpg)
But the contract’s first payment milestone falls after period-end.
![ae8](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae8.jpg)
So, by period end, the business will have performed work for the client.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae9.jpg)
And the income resulting from this work should be shown in the period-end reports.
![ae13](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae13.jpg)
However, because the business is yet to invoice the client, this income will not appear in the accounts as at period-end.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae11.jpg)
For reporting accuracy, you need to adjust the accounts.
![ae12](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae12.jpg)
When making this adjustment, you show that value will come from consulting income.
![ae13](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae13.jpg)
Then you record the amount owed in the accrued billings account.
![ae14](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae14.jpg)
The accrued billings account is an asset account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae15.jpg)
Like accounts receivable, it shows money owed to the business by customers.
![ae16](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae16.jpg)
Recording Accrued Income
To make the adjustment, you calculate the amount of consulting income not yet received.
![ae17](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae17.jpg)
Once calculated, you credit the consulting income account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae18.jpg)
This shows that revenue will come from consulting income.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae19.jpg)
After this, you debit the accrued billings account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae20.jpg)
This shows you have recorded the amount owed in accrued billings.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae21.jpg)
Unreported Expenses
At period-end, the accounts may also be missing expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae22-1.jpg)
For example, during the period, a business may incur telephone expense.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae23-1.jpg)
Often, though, the business will not be invoiced for telephone expense until after period-end.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae24-1.jpg)
Because of this, you will have had no reason to record the expense, as at period-end.
![ae25](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae25.jpg)
For reporting accuracy, your period-end reports should contain any unreported expenses such as telephone expense.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae26.jpg)
So you need to adjust your records.
![ae27](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae27.jpg)
When making this adjustment, you use an account known as an accrued expense account.
![ae28](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae28.jpg)
An accrued expense account is a liability account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae29.jpg)
Like supplier accounts, it shows money the business owes to others.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae30.jpg)
After you record the amount likely owed, you allocate the expense to the appropriate expense account.
![ae31](https://seeaccountingnow.online/wp-content/uploads/2021/06/ae31.jpg)
Recording Accrued Expenses
To record the likely expense, you begin by determining the portion of the expense already consumed, as at period-end.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae32.jpg)
Then you apply this portion to the typical bill to arrive at an estimate of the likely expense.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae33.jpg)
Once estimated, you credit the accrued expense account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae34.jpg)
This shows a value of services has come from accrued expenses.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae35.jpg)
Next, you debit the relevant expense account.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae36.jpg)
This shows where you are allocating the likely expense.
![](https://seeaccountingnow.online/wp-content/uploads/2020/05/ae37.jpg)
© R.J. Hickman 2020