Asked Nov 23, 2019

Define adjustment entries and how they are passed?


Expert Answer

Step 1

Adjusting entries are those entries which are made at the end of the accounting period, to record the revenues in the period of which they have been earned and to record the expenses in the period of which have been incurred, as well as to update all the balances of assets and liabilities accounts on the balance sheet, and to ascertain accurate amount of net income (loss) on the income statement to maintain the records according to the accrual basis principle.


Accounting rules for journal entries:


  • To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.


  • To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.


There are two basic categories of adjusting entries:


  1. Deferrals – Deferred/Prepaid expenses, and Deferred/unearned revenue.
  2. Accruals – Accrued revenues, and accrued expenses.
Step 2

Few examples of adjusting entries are provided as below:

1) Insurance was paid at the beginning of the year for Three year period amounting to $3600 and was debited to Prepaid Insurance.

In this case, we need to account for the Insurance expenses for the current year amounting to $3600/3=$1200. The prepaid Insurance balance should also be deducted by $1200 and the amount of $3600-$1200= $2400 should be carried to the as prepaid expense in the balance sheet.

 2) The Unearned Revenue balance contains Income which relates to current year amounting to $2000.

In this case, the Income should be recognized in the current year. Instead it is getting reflec...

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.
Tagged in

Financial Accounting

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A

Q: The costs of materials consumed in producing good units in the Production Department of Jacobs Compa...

A: Calculate the material cost per unit for the month of June.


Q: Oriole has the following inventory data: Nov. 1   Inventory   34 units @ $6.70 each 8   Purch...

A: The cost of goods available for sale is the sum of the cost of inventory purchased at each time peri...


Q: Journalizing Purchases Transactions Enter the following transactions in a purchases journal. May 3 P...

A: Purchase Journal: Purchase journal records all the merchandise purchase on credit. In a single colum...


Q: I need to know how to record this transaction in a general journal. Paid semi-monthly payroll, which...

A: Payroll expenses are the amount of expenses that an employer pays to the employees for the work that...


Q: Midwest Fabricators Inc. is considering an investment in equipment that will replace direct labor. T...

A: Calculate the amount of annual net income.


Q: Jim has a house payment of $2,000 per month of which $1,700 is deductible interest and real estate t...

A: Click to see the answer


Q: Direct Materials and Direct Labor Variances At the beginning of June, Bezco Toy Company budgeted 21,...

A: a) Compute the direct material variance:


Q: Flint Company exchanged equipment used in its manufacturing operations plus $3,360 in cash for simil...

A: Click to see the answer


Q: FIND REVENUE Find the revenue for this problem and please provide the equation and method you came t...

A: Ending Retained Earning= Opening Retained Earnings+Profits Earned during the period-Dividends declar...