Accurate financial records are the backbone of any successful business. As a business owner, it’s essential to track your company’s performance and meet accounting standards by ensuring your books are up to date. One key part of this process is understanding adjusting journal entries (AJE)—crucial end-of-period adjustments that correct or update your financial records. Whether you’re working with an accountant or managing your own books, knowing how these entries work is essential for maintaining clear, accurate financial statements.
Below are the 10 most important adjusting journal entries every business owner should be familiar with.
1. Accrued Expenses
Accrued expenses represent costs that have been incurred but haven’t yet been paid or recorded. For example, if your business owes rent or salaries at the end of the month, an AJE is necessary to capture these unpaid amounts. Without this adjustment, you risk underreporting your liabilities, leading to an inaccurate picture of your financial health.
Example:
Debit Salary Expense, Credit Salary Payable.
2. Accrued Revenues
Accrued revenues refer to income that has been earned but not yet invoiced or received. If you’ve delivered a service or sold goods but haven’t yet billed the client, you’ll need an AJE to record this revenue and reflect your actual earnings for the period.
Example:
Debit Accounts Receivable, Credit Service Revenue.
3. Prepaid Expenses
Prepaid expenses occur when you pay for goods or services before they’ve been fully used. Common examples include insurance or rent payments. As time goes by, you need to adjust these entries to recognize the expense for the period it benefits.
Example:
Debit Rent Expense, Credit Prepaid Rent.
4. Unearned Revenues
Unearned revenue is money received from customers before delivering the goods or services. Since you haven’t earned it yet, it’s recorded as a liability. As you provide the goods or services, you’ll need to adjust your entries to recognize the income.
Example:
Debit Unearned Revenue, Credit Service Revenue.
5. Depreciation
Depreciation is the process of spreading out the cost of a long-term asset, like equipment or machinery, over its useful life. Recording depreciation helps match the asset’s cost to the revenue it generates, ensuring your financial statements are more accurate.
Example:
Debit Depreciation Expense, Credit Accumulated Depreciation.
6. Amortization
Amortization works similarly to depreciation but applies to intangible assets like patents or trademarks. An AJE ensures your financial records accurately reflect the gradual reduction in the value of these assets over time.
Example:
Debit Amortization Expense, Credit Accumulated Amortization.
7. Inventory Adjustments
Inventory adjustments account for changes in stock levels due to shrinkage, damage, or errors. Properly adjusting inventory ensures your cost of goods sold (COGS) and ending inventory balances are accurate.
Example:
Debit COGS, Credit Inventory.
8. Bad Debt Expense
Not every customer will pay their invoices, and bad debt expenses allow you to account for those uncollectible receivables. This adjustment ensures that your accounts receivable aren’t overstated.
Example:
Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts.
9. Interest Expenses
If your business carries loans or credit lines, interest will accrue over time. An interest expense AJE is necessary to account for any interest owed by the end of the accounting period, even if it hasn’t been paid yet.
Example:
Debit Interest Expense, Credit Interest Payable.
10. Wages Payable
Payroll periods don’t always align perfectly with accounting periods. This means that employees may have earned wages that haven’t been paid yet. An AJE for wages payable reflects the amount owed to employees for work already performed but not yet paid.
Example:
Debit Wages Expense, Credit Wages Payable.
Conclusion
Mastering these 10 adjusting journal entries is essential for any business owner looking to maintain accurate financial records. Proper adjustments prevent you from underreporting expenses, overstating revenue, or distorting your financial position. If bookkeeping feels overwhelming, especially when it comes to making these critical adjustments, it might be time to get professional help.
How Accredited Bookkeeping Can Support Your Business
At Accredited Bookkeeping, we understand the challenges small businesses face when it comes to managing finances. We’re here to help you streamline your bookkeeping processes, avoid unnecessary financial errors, and gain greater clarity about your financial health. Our services are designed to fit the specific needs of your business, giving you peace of mind while you focus on growth.
Contact us today for a free consultation and discover how we can make bookkeeping easier for you.
📧 marianne@accreditedbookkeeping.com
Marianne Kirwan
📞 352-626-0116
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