Entries adjustments are necessary journal entries that you make after the first cut of the trial balance. It meant to transform your company’s accounting documents to the accrual basis of accounting. The primary objective was to ensure your organisation’s Balance Sheet, as well as Profit and Loss, adheres to the accrual basis of accounting.
The accrual basis of accounting needs you to match the expenditures with the relevant income in the given accounting period. In other words, when you prepare the bookkeeping, you must report the expenses as well as the income as they take place regardless of the timing of the payment. Nevertheless, you may occasionally postpone in recognising all financial transactions relating to a particular accounting period to fulfil the requirement of the Financial Reporting Standards. In this instance, you will undoubtedly require entries adjustment. Besides, you would have to pass an adjustment entry if you have recognised an expense in an accounting period when the expense is meant for a future accounting period.
Always keep in mind that you or the accounting firm in Johor Bahru you engaged will recognise the adjustment entry before releasing your company financial statements (Also see Is It Better For Your Company to Hire a Professional Accountant?).
Guide to key in the adjustment entry
To document the adjustment entry appropriately, adhere to these steps:
Identify both accounts included. Most of the times, these accounts are the balance sheet account as well as the Profit and Loss account.
Confirm the amount required to be passed for the adjustment entries
Enter the amount determined in both accounts
Ensure the debit and credit of the relevant accounts are correctly posted
Most commonly seen adjustment entries an be categorised as below:
Depreciation (Also see difference between impairment and depreciation) itself is a concept to allocate costs into the respective financial period, and that is precisely the core of the matching concept. Accumulated depreciation is a contra account that in turn “offset” the cost of asset periodically as the depreciation expense is being recognised.
Sometimes, you knew there were some costs that the company incur but have not received the supplier’s invoices. You would need an accrual account to take up the expenses relevant to the financial year according to the matching concept. As an illustration, your company may incur telephone charges in December 2018, but the actual bill will only be received in early January 2019.
Debit Telephone bill RM120
Credit Accrued expense RM120
On the different side of the matching concept, you to delay all the income made ahead of time to a liability account till the day they are fulfilling the revenue recognition criteria. For instance, if you received RM4,500 for a 3-months subscription, you should only recognised RM1,500 in the income for the next 3 months. The portion of RM4,500 that hasn’t fulfil the revenue recognition criteria should be reported as a liability in your company’s Balance Sheet.
From the above instance, you should only recognise RM1,500 out of the RM4,500 in the first month and leave the balance RM3,000 as deferred income. The adjustment entries you need to make are as follow:
Debit Deferred Income RM1,500
Credit Subscription Income RM1,500
Entries adjustment are critical in preparing the financial statements. Recognising what they are as well as the way to record them is a necessary step in guaranteeing that your service financial statements are precise.