As a matter of fact, financial occurrences happen all through the year. In most cases, these financial occurrences are recorded in books of accounts, in various ways depending on their nature. Notably, the recordings are first made in journal entries which mark the first step in financial analysis. An example of financial entries that are made in accounting is the adjusting entries. Arguably, adjusting entries are associated with income statement accounts as well as balance sheet accounts, (Loren, John & Jefferson, 2009).
Importance of adjusting entries
In this context, adjusting entries can be defined as journal entries that are usually made when an accounting phase comes to an end so as to allocate expenses as well as revenues to the phase in which they are related. They are essential in bringing up to date all account balances prior to preparation of financial statements. It is importance to note that, the adjustments are as a result of minor changes in account balances or passage of time and not due to physical transactions or occurrence. In order to make these adjustments, an accountant has to scrutinize the trial balance to note the amounts that need to be altered before preparing financial statements, (Loren, John & Jefferson, 2009). Therefore, these entries can be said to be essential in achieving a spotless finish at the last part of the accounting phase as well as to ensure that accurate and complete accounts are made. Some of the errors that necessitate preparation of adjusting entries are posting amounts to wrong accounts as well as differences in timing in realizing expenses and revenues between cash and accrual base of accounting. Notably, these adjustments may be temporary in that they will be reversed later, or they may be permanent, (Clyde, Roman & Katherine, 2009).
4 types of adjusting entries
As mentioned above, there are various adjustment entries that can be made in accounting records, (Clyde, Roman & Katherine, 2009). However, in a manufacturing company the four basic adjusting entries that are made are: accrued expenses, accrued revenues, unearned revenues, and prepaid expenses. Precisely, these four adjustment entries arise from two broad categories of accounting entries; accruals and deferrals. Accrued expenses refer to expenses that have already been incurred but have not been either recorded or paid. The best illustration of this kind of adjustment entry is the payment of wages of employees incurred at the last day of an accounting phase, which in most cases are paid in the next payroll date. Generally, these entries repeal the following month. This is recorded as follows,
- Wages Expense 61,000
- Wages payable, 61,000
The second example of adjusting entries is accrued revenues. This refers to the revenues that, though earned, have not been posted to the general ledger or not yet received from the client. For instance, the company may have ordered a given number of computers for the accounting department that have been shipped by the client but are yet to be received during the closure of the account receivable module. Therefore, an adjustment needs to be made to identify the revenue in the relevant period, and the entry will be reversed when an invoice will be made to the client. This is recorded as follows,
- Accrued revenues 40,000
- Revenue 40,000
Thirdly are unearned revenues. These are revenues that have been received but have not been earned, which are usually recorded as liabilities, (Clyde, Roman & Katherine, 2009). An example of this revenue is payment made by a client for a product which the company is yet to send to this client. Notably, adjustment entries of this kind are usually adjusted by other entries. For example,
- Revenue 20,000
- Deferred Revenue 20,000
Lastly are prepaid expenses. These are expenses that are yet to be incurred but have been paid for by the company. Examples of this kind of expenses are insurance premiums as well as bad debt allowances. They are recorded as follows,
- Insurance expense 2,000
- Prepaid Insurance 2,000
- Bad Debt 100
- Allowance for Bad debt 100
How they are recorded in computerized accounting system
As mentioned early, a scrutiny of the trial balance is usually made at the end of each closing phase, preferably, each end month. A journal input form is set whenever an adjusting entry is discovered. As a matter of fact, supporting documents justifying the entry which have been evaluated and endorsed by the relevant accounting management must be availed. Thereafter, the journal entry entered into the general ledger system. Notably, the entry is made as; either, self reversing or standard entry, (Loren, John & Jefferson, 2009). This is then followed by posting of such journal entry to the general ledger.
Ethical issue associated with these entries
Undeniably, various ethical issues associated with these entries often arise. However, the most common is the falsification of the amount of revenue or expense that was anticipated. To be more precise, the management can easily manipulate financial results of the company by using the adjusting entries. This can be done by either accruing more expenses or revenues than the expected amounts. This explains the reason why there is needs to prepare supporting documents which must be endorsed by relevant authority to justify each and every adjustment entry, (Loren, John & Jefferson, 2009).
Clyde, P.S., Roman, L.W & Katherine, S. (2009). Financial Accounting: An Introduction to
Concepts, Methods and Uses. New York: Cengage Learning.
Loren, A.N., John, D.B & Jefferson, P.J. (2009). Intermediate Accounting. New York: Cengage