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 entries (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.
- These accounting entries are recorded at the end of the accounting period after preparation of trial balance but before the preparation of financial statements.
- At the end of an accounting period, some expenses and revenues may not have been recorded or updated according to accrual and matching principle. If necessary adjustments are not made, then various accounts, including some revenue, expenditure, assets, and liabilities accounts will fail to reflect the accurate and fair values.
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.
- 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 period. The incurred expense will adjust the income statement and the balance sheet as follows.
The accrued interest 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 #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.
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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 insurance. The journal entry will be:-
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 balance for the year ending 31/3/20** as follows:-
The accountant of the company needs to take care of the following adjusting entries before closing its accounting records:-
Adjusting Entries are:-
The adjusted trial balance for the year ending 31/3/20** is as follows:-
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 statements. Thus these entries are very important towards the representation of accurate financial health of the company.
This article has been a guide to Adjusting Entries Examples. Here we discuss the definition and top 3 examples of Adjusting Journal Entries. You can learn more about accounting from the following articles –