Everything you need to know about Adjusting Journal Entries

Do you know what adjusting journal entries are?

If not...you should.

They are probably the biggest piece in a Month End Close process

Adjusting journal entries are entries booked to your general ledger to allocate the correct amount of income and expenses in an accounting period

This is most common with companies that follow the accrual basis of accounting, but even companies who follow cash basis will most likely need to book some adjusting journal entries each month

Adjusting journal entries are best maintained by a set of workpapers, typically in excel, showing how exactly the entries were calculated

Let's go over a few of the most common:

➡ PREPAID EXPENSES

Prepaid expenses are amounts paid for goods or services to be benefitted from in a future period.

This is especially common when you prepay for a 12 month subscription of something, but can also represent you purchasing something that you haven't used up yet (like a ticket to a conference next quarter)

➡ ACCRUED EXPENSES

Accrued expenses are expenses that have been incurred, but have NOT yet been recorded on a company’s general ledger

The most common example that I see is whenever a company knows that a service has been incurred, but they haven't received a bill yet from the vendor

➡ ACCRUED INTEREST

Accrued interest is booked to show the amount of interest due on debt that has NOT yet been paid

Here, just like a payable, you continue to increase your liability to reflect the amount of interest that's owed.

This is especially popular with convertible notes

➡ DEPRECIATION

Depreciation is recorded to reflect the wear and tear of a fixed asset over it’s useful life

Here you would use accumulated depreciation to show the cumulative reduction in the assets value

➡ INVENTORY

Inventory adjustments are booked when inventory gets moved to cost of goods sold

It can also be booked when items move from raw materials, to work in process, to finished goods

➡ DEFERRED REVENUE

Deferred revenue represents the amount of an invoice / payment received that has NOT been earned.

What other adjusting journal entries have you seen?