It is possible that some transactions are missed from the records and some are not recorded properly. These transactions must be properly dealt with before the preparation of financial statements. The recording of such transactions in the books is known as adjustments. An adjustment can also be defined as to make a correct record of a transaction which has not been entered or which has been recorded only in an incomplete or wrong way.
An adjusting entry is an entry which brings the balance of an account up-to-date to find the correct balance and correct information at the end of an accounting period.
Objectives/purpose of adjusting entries:
Following are the main objectives of adjusting entries:
- To show a fair record of all expenditures and all revenues relating to the period whether such expenditure has been actually paid or not and whether such income has been received or not.
- To correct the errors if found so that the result disclosed by the financial statements may be as reliable as possible.
Kinds of adjusting entries:
The number and variety of adjustments necessary at the end of an accounting period varies with the nature of the business. Most common adjustments related to expense and revenue are as follows:
- Adjusting entry to record interest on capital
- Adjusting entry to record interest on drawings
- Adjusting entry for closing inventory
- Adjusting entry to record supplies expense
- Adjusting entry to record depreciation expense
- Adjusting entry for accrued/outstanding expense
- Adjusting entry for unexdpired/prepaid expense
- Adjusting entry for accrued/receivable income
- Adjusting entry for unearned income or income received in advance
- Adjusting entry for allowance for uncollectibles/bad debts