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Journalizing and Posting Adjustments
Once the financial reports are complete it is very important that the adjustments made on the worksheet are journalized and posted to the ledgers. Adjusting entries are required because normal journal entries are based on actual transactions, and the date on which these transactions occur may not be the date required to fulfill the matching principle of accrual accounting.
The two major types of adjusting entries are:
· Accruals: for revenues and expenses that are matched to dates before the transaction has been recorded.
· Deferrals: for revenues and expenses that are matched to dates after the transaction has been recorded.
Accrued items are those for which the firm has been realizing revenue or expense without yet observing an actual transaction that would result in a journal entry. For example, consider the case of employees who are paid on the first of the month for the salary they earned over the previous month. Each day of the month, the firm accrues an additional liability in the form of salaries to be paid on the first day of the next month, but the transaction does not actually occur until the paychecks are issued on the first of the month. In order to report the expense in the period in which it was incurred, an adjusting entry is made at the end of the month. For example, in the Wrye’s Putt Putt Gold example from lesson 6 accured wages of $385.00 were adjusted. The journal entry would look like this:
In theory, the accrued salary could be recorded each day, but daily updates of such accruals on a large scale would be costly and would serve little purpose - the adjustment only is needed at the end of the period for which the financial statements are being prepared.
Some accrued items for which adjusting entries may be made include:
Deferred items are those for which the firm has recorded the transaction as a journal entry, but has not yet realized the revenue or expense associated with that journal entry. In other words, the recognition of deferred items is postponed until a later accounting period. An example of a deferred item would be prepaid insurance. When the insurance policy is purchased it becomes an asset in the Prepaid Expenses account. At the end of each month this asset will be adjusted to reflect the amount "consumed" during the month. The adjusting entry would be (again from the Putt Putt Golf):
This adjusting entry transfers $350.00 from the Prepaid Expenses asset account to the Insurance Expense account to properly record the insurance expense for the month of June. In this example, a similar adjusting entry would be made for each subsequent month until the insurance policy expires 11 months later.
Some deferred items for which adjusting entries would be made include:
Each of the adjustments are carried over to the journal in the same way (debit on the worksheet = debit in the journal). Once all the adjusting entries have been made you then post the entries to the ledger accounts. Remember to maintain the balance in each ledger account and to fill in the posting reference. In the case of Wyre’s Putt Putt Golf the completed adjusting entries in the journal would look like this:
Once you understand how (and why) to journalize the adjusting entries and post them to their respective ledger accounts you may do the homework assignment for this lesson. Once you have sent the homework to me you may take Quiz # 4