How to Adjust Entries in Financial Accounting

Many companies use accrual accounting methods requiring the accountant to record economic events and transactions in the periods in which they occurred. Accounting time periods vary depending on the needs of the company. An accounting period may be a week, a month, a quarter (three months), a year or longer. Accountants adjust entries at the end of accounting periods to ensure that the transactions have been recorded properly under the accrual method.

Trial Closing Balances

Create a trial closing balance on all the accounts you wish to adjust and then close it at the end of the accounting period. Before adjustments, these trial balances might not be up-to-date or complete. Trial balances usually come from the accountant’s unofficial ledger or a daily (or weekly) balance sheet. If the adjusting process takes more than a day, then you can update the ledger or balance sheet with the daily-adjusted entry until the accounts are accurate and closed.

Types of Adjustments

Some types of adjusting entries are moved to the correct time period, while other entries are added during the closing of account records that occurs at the end of an accounting period. Adjusting entries may be classified as either deferrals or accruals. Deferrals include prepaid expenses and unearned revenue. Accruals include accrued revenues and accrued expenses. Usually, deferrals must be documented as a portion of already recorded money earned or spent in the current period. Accruals are different; most of the time the money from an accrual isn’t recorded at all until the accountant is ready to begin adjusting entries.

Adjusting for Prepaid Expenses

To record prepaid expenses, accountants increase the amount in the asset column by the amount prepaid; this demonstrates the value of the prepaid item or service. The value of prepaid expenses decreases over time as the item or services (and associated prepaid funds) are used. At the end of the accounting period, accountants adjust for prepaid funds by subtracting the total value of what was used during the period from the assets column and adding the value to the expense column to demonstrate that money has been used.

Adjusting for Accrued Revenue

Accrued revenues are earned during the accounting time period but not recorded until the accountant adjusts the trial closing balances. Accrued revenues may be from uncollected earnings because of late billing or customers who have yet to pay. Accountants record accrued revenue by increasing both asset and revenue accounts by the total unearned amount. This demonstrates that the money has been earned and will be held as an asset.

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