While exploring accounting terminology quite often we can gather the term adjusting entry is being broken-down. Sometimes it might be confusing to understand the essence of such term and its practical application. This article will encourage you to behold adjusting entries and understand when they are considerable and how to recount them.
The Essence
Each transaction which occurred during the accounting period and which had an impact on the financial dwelling of the business has to be recorded in the accounting books and first step for making such a represent is a general journal. From the general journal entries are being posted to the accounts of general ledger and at the demolish of the accounting period the balances in the accounts are summarized and trial balance sheet is prepared. This is a short and snappily overview of the procedures which are being done during the accounting period. Here we are talking about the transactions which occurred during the particular accounting period. However it might happen that clear transactions which occurred during prior accounting period will have an impact on recent period and even on several periods in the future. Since such transactions were already accounted for, performing only usual procedures to describe novel period transactions will not allow us to assume impact of past transactions on original accounting data.
Therefore adjusting entries are needed. Adjusting entries are made at the destroy of the accounting period and are aimed to narrate additional financial data which has an impact on the financial residence of the business during the novel period. Past period transactions which might impact future periods can be acquisition of fixed assets which are being musty by the business for quite long period of time and the depreciation of such assets, consumption of office supplies or other inventory which was acquired earlier, consumption of positive services which were acquired earlier and other.
Practical Examples
One of the most the most frequent reasons for the adjusting entry is calculation of depreciation. steal that the company for cash at the ruin of September acquired equipment, cost of which was $4000 and useful life is 5 years, straight line depreciation contrivance is applied to calculate depreciation. In September the following journal entry was made:
D Equipment $4000
___C Cash $4000
At the kill of October the adjusting entry to describe the depreciation will have to be accounted for, i.e. $67 ($4000/5 years/12 months) monthly depreciation expenses will have to be recorded by the following entry:
D Expenses $67
___C Accumulated depreciation of equipment $67
While performing usual accounting procedures, which do not include recording of adjusting entries, depreciation expenses would not be accounted for.
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