XYZ Company received an $800 deposit for work not yet completed. A company earned interest revenue from the bank on its checking account and had not yet recorded it.A company provided a portion of consulting services but has not billed the customer until the following month.Subscriptions to newspaper and magazines.When revenues are earned but not yet recorded at the end of the accounting period because an invoice has not yet been issued, nor has cash payment been received. When cash is received prior to earning revenue by delivering goods or services, the company records a journal entry to recognize unearned revenue. Deferred and accrued revenue Deferred Revenue These adjusting entries are depicted in the following tables with specific examples and journal entries. There are four specific types of adjustments:
Therefore, adjusting entries are required because of the matching principle in accounting. The accrual basis of accounting states that expenses are matched with related revenues and are reported when the expense is incurred, not when cash changes hand. This is an accounting system called the accrual basis of accounting. The first interest payment is to be made on June 30, 2018, and the company is preparing its financial statements for the year ending December 31, 2017.Įven though the interest payment is to be made on June 30 in the following year, to properly report the company’s financial status, the company must accrue the interest expense for the month of December and include that value even though the expense was not actually paid (i.e., an exchange in cash). Imagine there is a company called XYZ Company that took out a loan from a bank on December 1, 2017.
Updated DecemAdjusting Entries – Why Do We Need Adjusting Journal Entries?Īdjusting entries are required at the end of each fiscal period to align the revenues and expenses to the “right” period, in accord with the matching principle in accounting.
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