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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Let's ANALYZE and JOURNALIZE…

When to Journalize 

Journalizing begins when an event or transaction took place.

When a source document is received or prepared, the staff prepares a voucher (such as check voucher, cash voucher, petty cash voucher, journal voucher, sales voucher, purchase voucher, and similar documents).

Or, when sales transaction happened, the staff prepares and issues sales invoice and/or official receipts.


How to record the business transaction or events


Step 1

Remember the debit and credit guiding principle. 

DEBIT the Value Received

CREDIT the Value Parted With 

Discern which debit and credit rules applies to the transactions or events.

Step 2

Analyze the business transaction or economic event

• Identify the value received

In other words, answer the question what is the value received. 

• Identify the value parted with 

In other words, answer the question what is the value parted with. 

• Assign the account title for the value received

Meaning, look at the chart of accounts of the company and identify the assigned account title appropriate for the value received.

Say, a coin, a paper money, a cheque, a bank draft.  All of these items belong to the cash and cash equivalent account. So, the account title to be used is cash and cash equivalent.

• Assign the account title for the value parted with

Meaning, look at the chart of accounts of the company and identify the assigned account title appropriate for the value parted with.

• What is the effect of the value received in the accounting equation 

Answer the question: What is the effect of the value received in the assets, liabilities or equity

• What is the effect of the value parted with in the accounting equation

Answer the question: What is the effect of the value parted with in the assets, liabilities or equity

• Measure the amount equivalent of the value received

The amount equivalent is normally the value of money given away in exchange of the acquired thing of value.  See Measurement concepts and principles.

• Measure the amount equivalent of the value parted with

See above explanation

Step 3

Record the journal entry

• Record the date of the transaction

• Record the debit with the amount of the value received

• Record the credit with the amount of the value parted with

• Write the explanation of the transaction or events.

Click here to read illustrative examples in applying the above procedures in analyzing and recording business transactions and events.