What are Types of Adjusting Entries?

Types of Adjusting Entries

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Types of Adjusting Entries

Adjusting entries are made in the accounting records at the end of an accounting period to report all revenues and expenses in that period. They’re crucial for the accrual basis of accounting, ensuring that financial statements comply with the revenue recognition and matching principles. There are typically four types of adjusting entries:

It’s important to remember that adjusting entries are a result of the accrual accounting method. They ensure that financial statements are presented accurately at the end of an accounting period, reflecting the financial activities of the period accurately.

Example of Types of Adjusting Entries

Certainly! Let’s create a more detailed hypothetical scenario to illustrate each of the four types of adjusting entries.

Company: StarTech Solutions, a company that offers IT services and sells software subscriptions.

Date: Adjusting entries as of December 31, 2023.

  • Accrued Revenues: Scenario: StarTech provided IT consulting services to a client in December 2023 amounting to $10,000. The client will be billed in January 2024.
    Adjusting Entry:
   Date       Account Name             Debit     Credit
   12/31/23   Accounts Receivable    $10,000
              Service Revenue                   $10,000
  • Accrued Expenses: Scenario: StarTech’s employees earned salaries of $8,000 for the last week of December 2023, which will be paid on January 5, 2024.
    Adjusting Entry:
   Date       Account Name             Debit     Credit
   12/31/23   Salary Expense          $8,000
              Salaries Payable                  $8,000
  • Deferred Revenues: Scenario: On December 1, 2023, a customer paid StarTech $12,000 upfront for a software subscription that lasts for a year.
    Initial Entry (on December 1):
   Date       Account Name             Debit     Credit
   12/01/23   Cash                   $12,000
              Unearned Revenue                 $12,000

Adjusting Entry (to recognize December’s portion, i.e., $12,000 ÷ 12 months = $1,000):

   Date       Account Name             Debit     Credit
   12/31/23   Unearned Revenue        $1,000
              Subscription Revenue              $1,000
  • Deferred (or Prepaid) Expenses: Scenario: On November 1, 2023, StarTech paid $6,000 for a one-year insurance policy.
    Initial Entry (on November 1):
   Date       Account Name             Debit     Credit
   11/01/23   Prepaid Insurance       $6,000
              Cash                              $6,000

Adjusting Entry (to recognize November and December’s portion, i.e., $6,000 ÷ 12 months x 2 months = $1,000):

   Date       Account Name             Debit     Credit
   12/31/23   Insurance Expense       $1,000
              Prepaid Insurance                 $1,000

These adjusting entries ensure that StarTech Solutions’ financial statements for the year ending December 31, 2023, accurately reflect its revenues, expenses, assets, and liabilities for the period.

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