I have been asked by my supervisor to mentor a new accounting clerk in my department, I am hoping that when I’m done mentoring this person that they will understand accounting better. I am also hoping that my supervisor will be proud of me, and continue asking me to mentor new people, and hopefully give me a raise or a promotion.
To better understand accounting we need to know why adjusting entries are so important to a business. Adjusting journal entries are made at the end of each closing period to adjust the account balances.
Most of the time, this is necessary in order to achieve a clean cut-off at the end of the accounting period, and to ensure the accounts are complete, and accurate. Current account balances may not represent correct balances, because some mistakes were identified in the posting of transactions, and/or the accounting records are not updated to reflect new transactions or amount changes in previous transactions.
Examples would include amounts that were posted to the wrong accounts, and timing differences in recognizing revenues and expenses between the accrual and the cash basis of accounting. (Adjusting JE, 2010) Adjusting entries can be either temporary or permanent. If the entry is temporary at some point the adjusting entry will be reversed or another adjusting entry will be made to the account.
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I will know explain the four types of adjusting entries ,as well as give an example of each entry from the manufacturing industry.
Accrued revenues (also called accrued assets) are revenues already earned but not yet paid by the customer or posted to the general ledger. An example of accrued revenue would be for a custom ordered machine that has been shipped FOB shipping point on the day the accounts receivable module is closed and the approval to bill the customer has not been received by the billing clerk. An adjusting entry would be recorded to recognize the revenue in the correct period. This entry will reverse when the customer is appropriately invoiced. * Accrued Revenue 14,000
* Revenue 14,000 Unearned revenues (or deferred revenues) are revenues received in cash and recorded as liabilities prior to being earned. Unearned revenue is a liability to the entity until the revenue is earned. An example of unearned revenue would be if the customer paid a deposit for a custom ordered machine that has not been delivered, the deposit would be recorded as unearned revenue. This type of adjusting entry will be adjusted by another entry. * Revenue 14,000
* Deferred Revenue 14,000 Accrued expenses (also called accrued liabilities) are expenses already incurred but not yet paid or recorded. Examples of these types of adjusting entries could be for payroll that has been earned by employees on the last day of the period but not paid until the next payroll date. These types of entries generally reverse the next month. * Salaries Expense 89,000
* Salaries Payable 89,000
Prepaid expenses (or deferred expenses) are expenses paid in cash and recorded as assets prior to being used. The most common form of an adjusting entry for prepaid expense would be for the used portion of an insurance premium these types of adjusting entries are usually permanent. * Insurance Expense 1,000
* Prepaid Insurance 1,000 Other adjusting entries include depreciation of fixed assets, allowances for bad debts, and inventory adjustments. * Bad Debt Expense 50 * Allowance for Bad debt 50 (Adjusting EN, 2010)
It is also wise to know how these entries are recorded in a computerized accounting system, since everything is now done by computers. At the end of each closing period, usually monthly, a thorough analysis of the trial balance is performed. This analysis include performance budget to actual and month to month to ensure all of the accounts are correctly stated. When an adjusting entry is identified, a journal entry input form is prepared. This form should be supported with source documents that justify the entry and reviewed and approved by the appropriate level of accounting management. Once the approval has been obtained, the journal entry is keyed into the general ledger system as either a standard or self-reversing journal entry. The journal entry is than posted to the general ledger.
There is also ethical issues that can arise if these entries are not posted correctly, Adjusting journal entries are a good way for management to manipulate financial results by either accruing more revenue or expenses than appropriate, and for fraudsters to hide skimming, which is the misappropriation of cash. It is extremely important to understand that each adjusting journal entry must be fully supported and approved.
If you have any questions about what I have explained to you please don’t hesitate to ask me anything, I am here to help you succeed in this business, and in this firm.