The first, second, and third quarters have passed and now I've reached the fourth and last quarter in my bookkeeping class. This means that I got to face another lesson of keeping accurate bookkeeping records. Since for the past quarters, we have been using accrual basis of accounting, it is time to take another step and make adjusting entries. Adjusting entries is a financial report that ensures that you get a more accurate picture of the business' revenue and expenses, and consequently, of ones overall financial health. So, when it comes to accounting/bookkeeping, timing is everything. 

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Adjusting entries are made to update the accounts in an accounting system. Some accounts are not up-to-date hence requiring adjustments to get them to their correct balances. It converts a company's accounting records to the accrual basis of accounting. Accruals represent liabilities and non-cash-based assets used in accrual-based accounting. According to Narcisse, a Certified Public Accountant, the chief aim of accounting for accruals is to record the financial transactions of a business in the period in which they occur, rather than in the period in which cash is exchanged. 

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Adjusting journal entries are used to allocate:

• prepayment of an expense to the period when the expense is incurred

• unearned revenue (from an prepayment received) to the period in which it is earned

• accrued expenses (that are paid later) to the period when the expense is incurred

• accrued revenue (that has been earned but is received later) to the period it is earned

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Adjusting entries are also used to correct errors, and must be completed before a company’s financial statements can be issued. Common scenarios include when:

• No entries have been made in the company’s accounting records for certain expenses or revenues, but those expenses and/or revenues did occur in the period and must be included in the period’s income statement and balance sheet

• An entry has been made in the company’s accounting records, but the amount needs to be moved to the period in which the expense is incurred or the revenue is earned, or divided up between two or more accounting periods

• Something is booked to a capital account like Fixed Assets that, under company policy, should be booked to an expense account like Supplies Expense, or vice versa

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What is the process for making Adjusting Journal Entries?

(Click the image to know more)

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When are adjusting entries made?

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This will vary somewhat according to the needs of your business. Generally speaking, it’s part of the process of closing out a period of bookkeeping, which could be monthly, quarterly, or annually. For the most part, you’ll want to make adjusting entries before you run financial statements, so that you get a more complete and realistic view of your company’s financial profile.

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I must say that adjusting the entries is a hard job to do in accounting. Why? It is because accuracy is everything and everything must be accurate in it. As they say, you cannot correct the wrong doings with another wrong doings. Well, I hope that makes sense because another reason why preparing it is difficult is because in my bookkeeping class, it's either you'll get a perfect score if you really did all accurate or only 3 points if not. Making sure that all the records are accurate is very critical because the financial health of a business depends on it. This proves that adjusting entries is  really the best way to update the transactions happening in the business.

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