📘 1. Adjusting Entries

🔹 What Are Adjusting Entries?

Adjusting entries are made at the end of an accounting period to update account balances before preparing financial statements. They ensure revenues and expenses are recognized in the correct accounting period according to the accrual basis of accounting.

🔹 Why Adjust?

  • Some transactions affect more than one accounting period.

  • Some expenses/revenues are incurred or earned but not yet recorded.

  • To comply with matching principle (expenses matched with revenues they generate).

📚 2. Accruals and Deferrals

🔹 A. Accruals

  • Revenues or expenses that are recognized before cash is received or paid.

  • Example: You earned revenue but haven’t received payment yet (accrued revenue), or you owe salaries not yet paid (accrued expenses).

🔹 B. Deferrals

  • Cash has been exchanged, but the revenue or expense is deferred to future periods.

  • Example: You received cash in advance (deferred revenue) or prepaid rent for future months (prepaid expense).

⚙️ 3. Depreciation and Amortization Entries

🔹 Depreciation

  • Allocating the cost of tangible fixed assets (e.g., machinery, vehicles) over their useful lives.

  • Reflects wear and tear or usage.

Example:

  • Equipment costing $12,000 with 4 years useful life (straight-line):

Depreciation expense per year=12,0004=3,000text{Depreciation expense per year} = frac{12,000}{4} = 3,000

 

🔹 Amortization

  • Similar to depreciation, but for intangible assets (e.g., patents, copyrights).

  • Spreads the cost over the useful life of the intangible asset.

📊 4. Adjusted Trial Balance

🔹 What is it?

  • After all adjusting entries are posted, an adjusted trial balance is prepared.

  • Lists all account balances (both adjusted and unadjusted).

  • Used to verify total debits still equal total credits before financial statements are created.

🔄 5. Closing Temporary Accounts

🔹 What Are Temporary Accounts?

  • Revenues, expenses, and dividends (or withdrawals) accounts.

  • These track activity for a single accounting period.

🔹 Why Close Them?

  • To reset their balances to zero for the next accounting period.

  • Transfer their balances to Retained Earnings (or Capital account for sole proprietors).

🔹 How to Close?

Step Entry Description Example Entry
1 Close revenue accounts to Income Summary Dr Revenue, Cr Income Summary
2 Close expense accounts to Income Summary Dr Income Summary, Cr Expenses
3 Close Income Summary to Retained Earnings Dr Income Summary, Cr Retained Earnings
4 Close dividends (if any) to Retained Earnings Dr Retained Earnings, Cr Dividends

📝 Summary Table

Concept Purpose Timing
Adjusting Entries Align revenues and expenses to period End of accounting period
Accruals Record earned/incurred but unpaid/unreceived Before cash transaction
Deferrals Postpone recognition of cash received/paid Until earned/incurred
Depreciation/Amortization Allocate asset cost over useful life Periodically (monthly, yearly)
Adjusted Trial Balance Verify accounts after adjustments After adjusting entries
Closing Entries Reset temporary accounts to zero End of accounting period
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