Question

Assume today is December 31, 2019. It has been a wonderful year-end for you because your business is doing great! But don't forget that you need to complete all adjusting entries today Dec 31, 2019.

My 1st question: Why do you need to adjust entries for your business? Please feel free to use examples to explain this question if needed.

My 2nd question: How to adjust entries? Please use either Deferred accounts or Accrued accounts to explain this question. Here I want to show you how I'm going to submit my answer to the second question. Please feel free to follow my 3-steps instruction.

Step 1: Choose an account

Deferred Revenue (Unearned Revenue)

Step 2: Provide a scenario

for example:

I am the owner of Prof. Shu's Catering, LLC. On Dec 16, 2019, one of my clients came to my office and asked me to provide the catering service at his birthday party for the next 30 days. He paid me $1,000 in advance. Deal! I will need to adjust it on Dec 31. I will Debit "Unearned Revenue" for $500, and Credit "Service Revenue" for $500.)

Step 3: Write down the adjusting entry. (Only entries, no ledgers needed)

for example:

Date	Accounts and Explanation	Debit	Credit
Dec. 31	Unearned Revenue	500
	Service Revenue		500
	To record service revenue earned that was collected in advance.

Answer 1

Answer to 1st question: Why do you need to adjust entries for your business?

At the end of any financial year, there are certain adjustments to the books of accounts that are required, to fulfill the Matching Concept of accounting and to comply with the Accrual Basis of Accounting.

When we are preparing the final accounts of the organization, which is yet to be finalized, we come across the transactions or additional information relating to the period for which the accounts are being prepared.

Let's say, on 31st December 2019, the Accountant realized that the electricity expense is yet to be paid for the month of November 2019 that comes to $400, so now we need to make the adjustment entry to comply with the accrual basis of accounting. hence adjustment entry would be as follow:

Date	Account	Debit	Credit
31 December 2019	Electricity Expense	$400
	Electricity Payable		$400

Here, Electricity expense is being taken to Profit and Loss or Income and Expenses statement and Electricity Payable reflects on the Liability side of the Balance Sheet. Expenses are recognized whenever they are incurred, whether paid or not.

Adjustment entries are necessary for showing the impact of Accrual expenses and Income, Outstanding Expenses, Outstanding Income, Prepaid expenses or Prepaid Income, Depreciation of Assets, Appreciation of Assets, any errors to be rectified and for additional information.

Adjustment Entries are basically the Journal Entries at the end of the financial year to provide the true picture of the books of account and financial statements.

Answer to 2nd question: How to adjust entries?

Advance Revenue Account :

Example: The business has received the contract from Mr.Wayne for Legal Services for 12 months starting from 1st July 2019, and the financial year is the same as the calendar year. Mr.Wayne has paid $6000 in advance on the basis of the $500 per month against the invoice. The services have not been provided for 6 months at the end of the year, since it falls under the next financial year, hence adjusted journal entry at the end of the year would be as follow:

Date	Accounts and Explanation	Debit	Credit
Dec. 31	Legal Services (Sale of Service)	$3000
	Accounts Payable-Mr.Wayne		$3000
	$3000 is for the next financial year and should be debited from Sale of service(As invoice of $6000 was raised for 12months out of which 6 months fall in the next financial year) and credit $3000 represents a liability as the business is holding the advance income money from Mr.Wayne against which services are yet to be provided.