Adjusting Entries Examples

Adjusting Entries Examples

The following Adjusting Entries examples provide an outline of the most common Adjusting Entries. It is impossible to provide a complete set of examples that address every variation in every situation since there are hundreds of such Adjusting Entries. Adjusting entries, also known as adjusting journal entriesAdjusting Journal EntriesAdjusting Entries in Journal is a journal entry made by a company at the end of any accounting period on the basis of the accrual concept of accounting. Companies are required to adjust the balances of their various ledger accounts at the end of the accounting period in order to meet the requirements of the various authorities' standards.read more (AJE), are the entries made in the accounting journals of a business firm to adapt or to update the revenues and expenses accounts according to the accrual principle and the matching concept of accounting. To better understand the necessity of adjusting entries, the article will discuss a series of examples.

Note: Not all end of the accounting period entries are adjusting entries. For example, entry for some purchases or sales made on the last day of the accounting period is a primary purchase-sales journal and not an adjusting entry.

Top 3 Examples of Adjusting Entries

Below are the examples of Adjusting Journal Entries.

Adjusting Entries Example #1 – Accrued but Unpaid Expenses

Mr. Jeff, an owner of a small furniture manufacturing company named Azon, offers A-Z varieties of furniture. Azon ends its accounting year on June 30. The company took a loan of $100,000 for one year from its bank on May 1, 2018, @ 10% PA for which interest payments have to be made at the end of every quarter.

The accountant of the company needs to take care of this adjusting transaction before closing the accounting records of 2018.

Given:

  • Loan Amount: $100,000
  • Interest amount @10 PA: $10,000
  • Monthly Interest Payable: $833.33
  • 2 months interest payable: 1667
  • First interest payment due date: 31-Jul-18
  • Accounting year end date: 31-Jun-18

As per accrual principal company needs to record all the incurred expenses, whether paid or not. The company incurred interest expenses from 1/5/2018 to 30/6/2018, i.e., for two months, and the remaining un-incurred and unpaid interest expense will adjust in the next accounting periodNext Accounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance.read more. The incurred expense will adjust the income statement and the balance sheetBalance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.read more as follows.

Adjusting Entries Example 1-1

The accrued interestAccrued InterestAccrued Interest is the unsettled interest amount which is either earned by the company or which is payable by the company within the same accounting period.read more payable account will increase the liability of the company because interest expense was incurred but remain unpaid, and an equal amount will increase the expenses of the income statement.

Adjusting Entries Example 1-2

Adjusting Entries Example #2 – Prepaid Expenses

Mr. Jeff owner of Azon wants to ensure the inventory (or stock) of the company. He purchased an insurance policy on June 1, 2018, for a premium of $ 3000 for six months.

The accountant records the transaction of $3000 on 1/6/2018. The accounts need to be closed on 30/6/2018.

Now the entry for insurance reflects six months’ expenses, which have been paid, but by June end, coverage of only one month could have been used.

As per the accrual principle, only 1-month expenses can be adjusted against the income statement, and the remaining paid balance will increase the assets of the balance sheet as prepaid insurancePrepaid InsurancePrepaid Insurance is the unexpired amount of insurance premium paid by the company in an accounting period. This portion of unexpired insurance is an asset and will be shown in the balance sheet of the company.read more. The journal entry will be:-

Adjusting Entries Example 2
Adjusting Entries Example 2-1

Adjusting Entries Example #3

Jack owns a fast-growing retail store chain in China named Baba headquartered in Hong Kong. Being in the business for more than two decades, it has started making its presence nationwide and has made a good reputation amongst its major customer base.

Baba follows the same pattern as many commonwealth nations follow and close its accounting year on 31st March.

The accountant of Baba records journal entry daily and post them to ledger accounts periodically. He prepares the unadjusted trial balanceUnadjusted Trial BalanceAn unadjusted trial balance is the account balances reported directly from the general ledger without adjusting for the year-end journal entries. It acts as a starting point for analyzing account balances and adjusting entries.read more for the year ending 31/3/20** as follows:-

Adjusting Entries Example 3

The accountant of the company needs to take care of the following adjusting entries before closing its accounting records:-

AJE Example 3-1

Adjusting Entries are:-

AJE Example 3-2

The adjusted trial balanceAdjusted Trial BalanceAdjusted Trial Balance is a statement which incorporates all the relevant adjustments. Although it is not a part of financial statements, the adjusted balances are carried forward in the different reports that form part of financial statements. read more for the year ending 31/3/20** is as follows:-

AJE Example 3-3

Conclusion

A business needs to record the true and fair values of its expenses, revenues, assets, and liabilities. Adjusting entries follows the accrual principle of accounting and make necessary adjustments which are not recorded during the previous accounting year. The adjusting journal entry generally takes place on the last day of the accounting year and majorly adjusts revenues and expenses.

Adjusting Entries are made after trial balances but before the preparation of annual financial statementsAnnual Financial StatementsAnnual Financial Statements refers to the annual presentation of the entity's financial performance comprising a Balance Sheet, statement of profit and loss, statement of changes in equity, cash flow statement, and notes to the financial statements. It provides information to the stakeholders for making financial decisions about the business.read more. Thus these entries are very important towards the representation of accurate financial health of the company.

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