1. Understand WHAT are adjusting entries:

• Are journal entries made at end of month or year in order to match all expenses in the current month/year against the revenue associated to them;

• Based on Matching concept

3. Understand HOW MANY GROUP of adjusting entries:

• Deferrals

• Accruals

3a. Deferrals:

• Expenses deferrals/prepaid/prepayments like insurance, rental prepaid

• Depreciation

• Revenue Deferrals like unearned revenue

3b. Accruals:

• Income earned but not yet recorded ( sales recognition);

• Expenses incurred but not yet recorded( to match to revenue recorded) like utilities bills not received and includes doubtful debts.conservatism /prudence rule)

4. Remember that we have the unadjusted trial balance which is for checking the double entries and after completing all the above adjusting entries and posted into the ledger and all related accounts are adjusted, it then become the Adjusted Trial Balance which is the basis for the preparation of financial statements.

OTHERS:

A deferred revenue or income takes place when a payment is received before any service or good has taken place. Hence this payment received is credited as a liability in an account called unearned revenue until such service or good being provided.

A deferred expense takes place when a transaction involves COST but the related service has not been used up. A deferred expense is recorded as an assets Company often pays up rental and insurance in advance. When such related services are used up, the expenses will then be taken up by debiting expenses and credit such prepayment account.

Accruals need not be only expenses but also for income. An Accrued revenue often arises from interest from an investment

Refresh by going through the articles in the section on

“ADJUSTMENTS TO FINAL ACCOUNTS”