Adjusting Journal Entries. Explained.

In this video, we explain adjusting journal entries.

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0:00 Introduction
Why Adjustments are Needed (0:26-1:01): Adjustments are essential due to the periodicity principle and the going concern assumption.
Accounting Period Concept (2:30-4:11): The life of a company is broken down into artificial time periods (monthly, quarterly, annually) to report financial performance.
Going Concern Assumption (4:14-5:02): Assumes a company will continue to operate indefinitely, impacting how assets and liabilities are accounted for.
Interim Financial Reporting (6:46-7:42): Reporting for any period less than a full year (monthly, quarterly, semiannually).
Cash vs. Accrual Basis (9:13-11:57):
Cash basis: Revenue recognized when cash is received, expenses when cash is paid.
Accrual basis: Revenue recognized when earned, expenses when incurred, providing a more accurate financial picture.
Types of Adjustments (14:38-16:21):
Deferral of expense (prepaid expense): Costs paid in advance but not yet incurred.
Deferral of revenues (unearned revenues): Payment received before services are performed.
Accrued expenses: Expenses incurred but not yet paid.
Accrued revenues: Revenues earned but not yet received in cash.
The process of preparing adjustments (17:36-18:47): involves identifying the current balance for a particular account, determining what the balance should be, and adjusting the difference.



Adjusting entries involve increasing the expense and increasing the related payable.


Adjusting Entries in Accounting
Adjusting entries are journal entries made at the end of an accounting period to update account balances and ensure accurate financial reporting. These entries align the recorded amounts with the accrual basis of accounting, which recognizes revenues when earned and expenses when incurred, regardless of cash flow.

Purpose of Adjusting Entries
Ensure Accuracy: Reflect the true financial position and performance of the business.
Follow Accrual Accounting: Comply with the matching principle by recognizing expenses in the same period as the related revenues.
Prepare for Financial Statements: Provide accurate data for preparing the income statement and balance sheet.

Types of Adjusting Entries
Prepaid Expenses
Adjust for expenses paid in advance that have been partially consumed or expired during the period.
Example: Insurance or rent payments.

Accrued Revenues
Record revenues earned but not yet received or recorded.
Example: Interest income or services provided but not yet billed.

Accrued Expenses
Record expenses incurred but not yet paid or recorded.
Example: Wages or utilities payable.

Unearned Revenues
Adjust for revenues received in advance that have been partially earned during the period.
Example: Subscription or service fees collected before delivery.

Depreciation
Allocate the cost of a tangible fixed asset over its useful life as an expense.

Bad Debts
Estimate uncollectible accounts receivable and record them as an expense.

Process for Making Adjusting Entries
Review Trial Balance: Identify accounts needing adjustments.
Analyze Transactions: Determine amounts and accounts affected.
Prepare Journal Entries: Record the necessary adjustments in the journal.
Post to Ledger: Update the general ledger with the adjusting entries.
Prepare Adjusted Trial Balance: Ensure that debits equal credits after adjustments.

Effects of Adjusting Entries
Accurate Financial Reporting: Ensures the income statement and balance sheet reflect the actual financial performance and position.
Balance Sheet Adjustments: Updates asset, liability, or equity accounts.
Income Statement Adjustments: Reflects proper revenues and expenses for the period.
Automation in Adjusting Entries
Many modern accounting systems automate adjusting entries, particularly for recurring items like depreciation or accrued expenses, streamlining the process and reducing errors.



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