Adjusting Entries

After the preparation of unadjusted trial balance is the recording of internal events in the general journal and the posting to the ledgers.

These transactions do not involve exchanges with other entities, thus are not initiated by source document.

These transactions are recorded at the end of accounting period before the preparation of financial statements.

These transactions are the so-called adjusting entries. These entries are made to implement the accrual accounting model which means these entries satisfy the revenue recognition and matching principle.

Adjusting Entries help ensure that all revenues earned during the period are recognized in that period regardless when the cash is received.  Also, they enable the entity to recognize all expenses incurred during a period, regardless when cash is paid.

Consequently, the Income Statement of the period reflects a more complete picture of the company's performance.  The Statement of Financial Position presents a more complete assessment of assets and liabilities.

Adjusting Entries maybe thought of as a method of bringing the financial information of the entity up-to-date before preparing the financial statements.

The following are the basic adjusting entries:

• Prepayments or deferrals

• Precollections

• Accruals

• Estimates (depreciation and amortization, estimated uncollectible accounts)  

• Ending Inventories, if applicable         

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