Question

What does the term adjusting entry mean? What are some ways financial statements are affected if adjusting entries are not completed?

Answer 1

An adjusting journal entry is an entry in a company's general ledger that occurs at the end of an accounting period to record any unrecognized income or expenses for the period. When a transaction is started in one accounting period and ended in a later period, an adjusting journal entry is required to properly account for the transaction. Adjusting journal entries can also refer to financial reporting that corrects a mistake made previously in the accounting period.

KEY TAKEAWAYS

• Adjusting journal entries are used to record transactions that have occurred but have not yet been appropriately recorded in accordance with the accrual method of accounting.
• Adjusting journal entries are recorded in a company's general ledger at the end of an accounting period to abide by the matching and revenue recognition principles.
• The most common types of adjusting journal entries are accruals, deferrals, and estimates

If the adjusting entry is not made, assets, owner's equity, and net income will be overstated, and expenses will be understated. While most expenses are prepaid, a few are paid after a service has been performed.