Adjusting entries

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Welcome to a complete guide of adjusting entries in accounting! If you are on your way of converting this stack of binders full of documents to this compact set of financial statements, you’ll probably be recording your adjusting entries right about here. I will walk you through each of the five types of adjusting entries in lots of detail. • ⏱️TIMESTAMPS⏱️ • 00:00 Introduction to adjusting entries • 00:52 Recording cash transactions • 02:19 Trial balance (cash basis) • 03:37 Categories and types of adjusting entries • 04:40 Prepaid expenses • 06:46 Deferred revenue • 08:08 Depreciation adjusting entry • 09:49 Accrued expenses • 10:49 Accrued revenue adjusting entry • 12:00 Trial balance (accrual basis) • 12:49 Adjusting entries definition • 13:07 Adjusting entries summary • If you are adjusting, you need something to adjust from and something to adjust to. You are adjusting from a cash accounting based trial balance to an accrual accounting based trial balance. • Let’s get some of these bank transactions onto a #trialbalance , and then start adjusting. • Once we have this trial balance, we can review whether we need any adjusting entries. There are two categories of adjusting entries: adjusting entries that deal with SOMETHING, and adjusting entries that deal with NOTHING. If an adjusting entry deals with SOMETHING, then something has been entered in the general ledger, but the amount needs to be moved or split between accounting periods. The three types of adjusting journal entries in this category are: prepaid expenses, deferred (or “unearned”) revenue, and depreciation. If an adjusting entry deals with NOTHING, then we have a case where nothing has been entered in the general ledger yet, but certain expenses or revenues did occur that need to accounted for in the current period. The two types of adjusting journal entries in this category are: accrued expenses and accrued revenue. In total, there are two categories and five types of adjusting entries. The common theme is that we want to put revenues and expenses in the period they belong. Revenues are recognized when earned and expenses are recognized when incurred. • The definition of adjusting entries. Adjusting entries are accounting journal entries that convert a company's accounting records to the accrual basis of accounting. Adjusting entries almost always involve a balance sheet account and an income statement account. • A summary table shows the four possible combinations: revenues versus expenses, and accrued versus deferred or prepaid. Accrued revenue adjusting entries occur when revenue is earned before the invoice is sent and/or the payment is received, the revenue needs to be captured in the current period as this when you have earned it. Deferred revenue adjusting entries occur when revenue is earned after the invoice is sent and/or the payment is received, the recognition of the revenue needs to be postponed to a future period as you have not earned it yet. Accrued expense adjusting entries occur when expenses are incurred before the invoice is received and/or payment is made, the expenses need to be captured in the current period as this is when you have incurred them. Prepaid expense and depreciation #adjustingentries occur when expenses are incurred after the invoice is received and/or payment is made, the expenses need to be moved or split between accounting periods. • Philip de Vroe (The Finance Storyteller) aims to make accounting, finance and investing enjoyable and easier to understand. Learn the business and #accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers finance training in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In! • Want to get access to bonus content, and/or express your gratitude by buying me a cup of tea? Join my channel as a member through / @thefinancestoryteller

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