You may have heard the adjusting entries term before, especially when you are new to accounting. It might appear technical and daunting at first sight, but making entries changes are only minor modifications that will make sure that your financial records are correct. In their absence, what you are saying about your business may paint a false image.
We will take you through the process of what adjusting entries are, the importance of it, and give examples that are easy to understand in this guide. We will also demonstrate how cloud-solutions such as accounting software of FastLane HR can make it easy and error-free to adjust and maintain such changes.
What Are Adjusting Entries?
Adjusting entries are the entries to the journal at the end of an accounting period to make amends to the accounts prior to the preparation of the financial statements. They are used to book revenues and expenses in the year in which they are incurred and not the year in which the cash is exchanged.
For example:
- When you have provided a service, but you have not billed yet, that is an accrued revenue that should be changed.
- And the amount that you used in this month should be an expense in case you paid insurance in advance.
Concisely, adjustments of entries assist the firms to adhere to the principles of accrual accounting and maintain financial reporting.
Why Do businesses need to adjust their entries?
Adjusting entries is beneficial even to small businesses as they:
- Prepare financial statements that indicate the real financial position.
- Assist in adhering to accounting rules and regulations.
- Offer relevant information to decision-making, investors and auditors.
- Avoid making mistakes which might lead to tax penalties or bad financial planning.
Your financial reports would be incomplete or misleading without making an adjustment in entries.
Types of Adjusting Entries
The primary types of adjusting entries will be as follows:
Accrued Revenues- Services that are yet to be billed.
Accrued Expenses – This is expenses that are yet to make payment (e.g. salaries, utilities).
Prepaid Expenses- Advance payments that require to be divided in the long term.
Unearned Revenues – Reimbursement of payments prior to the execution of services.
Depreciation – The sum of money that is dividable among the useful life of a piece of equipment.
Such will allow adjustments so that income and expenses are adjusted to the appropriate time.
How to record Adjusting Entries: Step-by-Step
The following is an easy method of doing it:
- Trace the transaction requiring adjustment.
- Choose the accounts to modify (e.g. prepaid rent, salaries payable).
- Debit and credit should be recorded in the journal.
- Record the entries to the general ledger.
- Check with a trial balance then prepare financial statements.
Some Adjusting Entries (Easy to Understand)
Accrued Salary Expense
In December, your employees were paid hundreds of thousands of dollars in wage, and you are going to pay them in January.
Debit: Salary Expense $5,000
Credit: Salaries Payable $5,000
Prepaid Rent
That was a year of rent of 12,000 dollars. You must accrue rent cost of 1000 every month.
Debit: Rent Expense $1,000
Credit: Prepaid Rent $1,000
Unearned Revenue
One of your clients has pre-paid you 2,400 in a 1-year service contract. After the first month:
Debit: Unearned Revenue $200
Credit: Service Revenue $200
Depreciation
You have bought a 5-year old equipment at a cost of 6000. Monthly depreciation is $100.
Debit: Depreciation Expense $100
Credit: Accumulated Depreciation 100.
These examples indicate that modifying entries are helpful in fixing the income and expenditure at the right place.
Frequent Errors by Entries Adjusters
Professional bookkeepers are also capable of errors including:
- Failure to change prepaid or unearned accounts.
- Incorrect accounting period entries.
- Ignoring depreciation adjustments.
- reconciliation Not after adjustments.
It is possible to reduce these errors using cloud-based tools that will automate repetitive entries.
Simplification of Entries Adjustment Using Cloud Based Accounting Software
Preparation of adjusting entries may be a tedious task done manually. You can with cloud-based accounting software such as FastLane HRs:
- Automate Recurring adjustments (depreciation, accruals).
- Minimize mistakes through real-time monitoring.
- Time savings in dashboards giving you an overview of the financial situation instantly.
- Make accounting standards easily compliant.
This simplifies the process of accounting on SMEs and saves time to concentrate on business development.
Frequently Asked Questions on Adjusting Entries
It will affect your financial statements as they will be inaccurate and can mislead the stakeholders.
Yes. Cash based accounting does not make use of adjusting entries.
Yes. Most of the adjustments can be automated by using cloud-based systems such as FastLane HR.
Of course–the accuracy is important irrespective of the business size.
Conclusion
The adjustment of entries can seem difficult to do, yet, they are mere adjustments that make sure revenues and expenses are marked in the right period. They will be necessary to ensure proper financial reporting, to prevent the expensive errors, to have a clear measure of the performance of your business.
Using accounting software by FastLane HR you will not need to strain yourself making the necessary changes manually. Our products make accounting easier, have auto-complete features, and keep your business on track.
Are you ready to make accounting stress-free?
Contact FastLane HR today and find out how our cloud services can make your business to expand.