Adjusting Entries

Allocate Income/Expenses to period where they actually occurred and for correct amounts Require both B/S and I/S

1. Accrued Revenues 2. Accrued Expenses 3. Deferred Revenues 3. Deferred Revenues

Accrued revenue occurs when you make a sale and collect payment at a later date. An adjusting entry to record accrued revenue increases the revenue account and the accounts receivable account by the amount of the sale. Accounts receivable shows the amount customers owe you. For example, assume your small business sold a $100 product in the current period and will collect payment in the next period. You create an adjusting journal entry in the current period that adds $100 to your revenue account and adds $100 to accounts receivable.

An accrued expense is one that you incur but have not yet paid. An adjusting entry to record an accrued expense increases the expense account that corresponds to the expense incurred and increases the appropriate payable account. A payable account shows the amount you owe other parties. For example, if your small business accrues a $5,000 expense for salaries in the current period and will pay your employees in the next period. You add $5,000 to the salaries expense account and to the salaries payable account in an adjusting journal entry.

Deferred, or unearned, revenue occurs when you receive cash up front for services you will provide in the future. As you provide the services to earn the revenue, you create an adjusting entry that increases the revenue account and reduces the unearned revenue account by the amount earned. For example, assume your small business collected $100 at the beginning of the month to provide a monthly service. At the end of the month, you create an adjusting entry that adds $100 to the revenue account and reduces unearned revenue by $100.

A deferred, or prepaid, expense is one for which you paid cash up front at an earlier date but which you have not yet incurred. As you incur the expense, you create an adjusting entry that increases the appropriate expense account and reduces the prepaid expense account. For example, if your small business prepaid $1,000 for rent at the beginning of the month. You create an adjusting entry at the end of the month that adds $1,000 to the rent expense account and reduces the prepaid rent account by $1,000.