American Intercontinental University
As an accountant in a medium-sized manufacturing company it’s my job to help people out whenever I can. Last week I was asked to mentor an accounting clerk who is new to my accounting department. I will be explaining why adjusting entries are necessary, also I will be describing the four types of adjusting entries, and provide a manufacturing industry example of each and describing how these entries would be recorded in a computerized accounting system. Finally I will be describing one ethical issue that could result from the preparation of these manufacturing entries.
Adjusting entries are necessary because in order to achieve a clean cut-off at the end of the accounting period and to ensure the accounts are complete and accurate. (Adjusting JE, 2010) Adjusting entries can be either permanent or temporary. A friendly reminder if the entry is temporary it can eventually be reversed or another adjusting entry will be made to the account.
The four types of adjusting entries is prepaid expenses, accrued revenues, accrued expenses and unearned expenses. Prepaid expenses (or deferred expenses) are expenses paid in cash and recorded as assets prior to being used. Often a transaction affects the revenue or expenses of two or more accounting periods. The related cash inflow or outflow does not always coincide with the period in which these revenue or expense items are recorded. Thus, the need for adjusting entries results from timing differences between the receipt or disbursement of cash and the recording of revenue or expenses. The most common form of an adjusting entry for prepaid expense would be for the used portion of an insurance premium. These types of adjusting entries are usually permanent. Here are some examples:
Insurance Expense 1,000
Prepaid Insurance 1,000
Other adjusting entries include depreciation of fixed assets, allowances for bad debts, and inventory adjustments.
Bad Debt Expense 50
Allowance for Bad debt 50 (Adjusting EN, 2010)
Accrued revenues (also called accrued assets) are revenues already earned but not yet paid by the customer or posted to the general ledger. An example of accrued revenue would be for a custom ordered machine that has been shipped FOB shipping point on the day the accounts receivable module is closed and the approval to bill the customer has not been received by the billing clerk. An adjusting entry would be recorded to recognize the revenue in the correct period. This entry will reverse when the customer is appropriately invoiced. Accrued Expenses (also called accrued liabilities) are expenses already incurred but not yet paid or recorded. Examples of these types of adjusting entries could be for payroll that has been earned by employees on the last day of the period but not paid until the next payroll date. These types of entries generally reverse the next month.
Unearned expenses (or deferred revenues) are revenues received in cash