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Adjusting Entries

Adjusting Entries

Author: Evan McLaughlin
Description:
In this lesson, the student will learn about adjusting entries and when they are utilized.
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Tutorial

"Adjusting Entries"

Source: Instrumental “Drops of H2O ( The Filtered Water Treatment )" by J.Lang (feat. Airtone),” Creative Commons, http://ccmixter.org/files/djlang59/37792

Video Transcription

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Hey everyone, and welcome to today's video on adjusting entries. So what's today's video all about? Well, we're going to talk about adjusting entries, the what, when, where. And we're going to look at the different types of adjusting entries there are. But first, let's dive into what adjusting entries are.

Adjusting entries, that's an entry that is made at the end of an accounting period to report any unrecognized income or expenses for that period. Now, what are they for? They're to correct values.

So this talks about our matching principles, our revenue recognition and our expense recognition. Match those revenues and expenses with the correct period. And they're also used to correct errors and omissions. So if we've made any errors or mistakes during our journalizing and posting process, we could correct that through an adjusting entry.

Now, when are they entered? Are they entered at the beginning of our period or are they entered at the end of our period? Like it says up there in the definition, they're entered at the end, so not the beginning, at the end of the period. They're not recorded as part of our daily activity.

Now, where are our adjusting entries entered? They're entered in the general journal, which then gets posted to the general ledger. So our adjusting entries are entered in our general journal, and then posted to the general ledger. And we also put our adjusting entries in our trial balance worksheet, which we work through at the end of the period.

But let's talk about the different types of adjusting entries, starting with unearned revenues. So why is this adjustment made? The initial transaction, services were paid for, but had not been performed. Cash received, no revenue recorded. Then during the period, services were performed.

So what adjustment is needed? At the end of the period, we have to recognize the revenue earned during the period. And that speaks to our revenue recognition principle.

Next adjustment, prepaid expenses, why is this adjustment made? Initially, the expense was paid for, but had not been incurred. So cash paid, no expense incurred or recorded. Then during the period, we incurred that expense.

So what adjustment is needed? At the end of the period, we have to record the expense incurred during the period. So that expense recognition principle, we have to recognize that expense.

Next adjustment, our accrued expenses. Why is this adjustment made? Well, initially, no transaction was recorded. And then during the period, we incurred an expense but we have not paid or recorded that expense. So expense needs to be recorded before paid.

So why is this adjustment needed? Again, to record the expense incurred during the period. That gets to our expense recognition principle.

So we talked about accrued expenses, now accrued revenues. So why is this adjustment made? Initially, no transaction was recorded. And then during the period, revenue has been earned, but not paid or recorded.

So what adjustment is needed? At the end of the period, we have to record the revenue that we earned during the period. So that gets to our revenue recognition principle. Record revenue as it's earned.

Now let's talk about another adjustment, for supplies. Why is this adjustment made? Initially, when we purchased our supplies, we recorded them as an asset. And then during the period, we used those supplies in our business operations.

So now we don't have as many supplies on hand. And they were used in our business. They were used to help generate revenue.

So what adjustment is needed? At the end of the period, we record the use of those supplies as an expense. So we record the use of those supplies as an expense. And that speaks to our expense recognition principle. And it's also so that we can reflect the appropriate asset value in our supplies account, as we now have less on hand than when we purchased them.

Let's look at another adjustment, depreciation. Why do we make this adjustment? Well, initially, we purchased an asset, equipment. A portion of the asset's useful life has now been used. It was used to help us generate revenue. So what adjustment is needed? At the end of the period, we have to record the portion of the useful life used as an expense, as depreciation expense.

Last adjustment, error correction. Why is this adjustment made? Well, let's look at this transaction. We perform services. And at that time, we recorded revenue and a receivable.

Then during the period, when we received the cash payment from that customer, we ended up recording it as revenue again. So we've recorded revenue twice. So what adjustment is needed? At the end of the period, we have to correct the revenue that we recorded from our cash payment because we correctly recorded it when we performed those services. So we have to make that correction for the double counting of revenue.

Now, let's summarize. In a nutshell, what did we talk about today? We talked about adjusting entries. Adjusting entries are done at the end of the period. And they're used to match revenues and expenses with the correct period. And we also use them to make corrections, to correct errors or omissions.

And then we walked through several examples of adjusting entries that you'd see in practice. I hope everybody enjoyed this video. And I hope to see you next time.

Notes on "Adjusting Entries"

Terms to Know

Adjusting Entry

An entry that is made at the end of an accounting period to report any unrecognized income or expenses for that period.