Why Adjusting Entries Are Essential for Accurate Books

by Brian J. Eagan, CPA | Selden Fox

Many business owners focus on increasing sales, driving profit, and enhancing product or service offerings. Their priorities also include managing employees and fostering relationships with vendors and bankers to get the capital needed to enhance operations, among other priorities. Unfortunately, quite often little attention is paid to the accounting and bookkeeping process other than ensuring all transactions are properly entered in the company’s software. While transactional data is important to the bookkeeping process there are other steps that must be taken to ensure an accurate report of the company financial position. Assuming a company uses the accrual method of accounting (and most do) then adjusting entries are needed to close out a reporting period (month or quarter). To help clients, prospects, and others understand the importance of these entries, Selden Fox has provided a summary overview below.

What are Adjusting Entries?

These are entries made to a company’s accounting journal that ensure expenses and income are allocated in the period in which they occurred. For example, a company receives their January electric bill on February 10. Although the invoice was received in the month of February the expense was for resources used in January. For this reason, it’s necessary to make an adjusting entry to ensure the expense is matched with the proper accounting period.

Types of Adjusting Entries

• Accrued Revenues – These are revenues which have been earned, but no payment has been received because the customer has not yet been billed. Since the income was earned in a specific period it is important to make an adjusting entry to reflect that fact.
• Accrued Expenses – These are expenses which have been incurred but the provider’s invoice may not have been processed and paid. Since the expense was incurred in a certain period, it is necessary to make the adjustment to reflect that fact.
• Deferred Revenues – These are revenues that have been received in advance of a product or service being delivered to the customer. An example of this type of revenue would be a retainer sent by a new client prior to the commencement of work.
• Prepaid Expenses – These are expenses paid in advance of being invoiced by a provider. Since the expense was not incurred in the period but was paid, an adjustment is needed to document the proper application period.

Contact Us

Adjusting entries can become a complex bookkeeping and accounting task and are equally important to ensure your company has precise books. If you have questions about adjusting entries or need assistance with your accounting, Selden Fox can help. For additional information call us at 630.954.1400 or click here to contact us.

 

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