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What is an adjusted journal entry?

An adjusting journal entry is a type of accounting entry made at the end of an accounting period to accurately record and report financial transactions that occurred but were not initially recorded or properly reflected in the company’s books. These entries are necessary to ensure that the financial statements reflect the true and accurate financial position of the company.

There are two primary types of adjusting journal entries:

1. Accruals: Accruals are used to recognize revenue or expenses that have been earned or incurred but have not yet been recorded. For example, if a company has provided services to a customer in one accounting period but has not yet received payment, an accrual entry is made to recognize the revenue earned. Similarly, if a company has incurred expenses, such as utilities or wages, but has not yet received or paid the bills, accrual entries are made to recognize the expenses.

2. Deferrals: Deferrals are used to adjust for transactions where cash has been received or paid in advance but revenue or expenses related to that cash flow have not yet been earned or incurred. For example, if a company receives an advance payment from a customer for services to be provided in the future, a deferral entry is made to defer the revenue recognition until the services are actually performed. Similarly, if a company pays for insurance coverage for the upcoming year, a deferral entry is made to allocate the expense over the coverage period.

Adjusting journal entries are necessary because many transactions do not occur at the same time as the associated revenue or expense recognition. They ensure that revenue and expenses are properly matched to the accounting period in which they are earned or incurred, following the accrual basis of accounting.

These entries are typically made at the end of the accounting period before the preparation of financial statements. They are based on estimates, judgments, and supporting documentation to reflect the most accurate financial position of the company.

Adjusting journal entries are an integral part of the accounting cycle and are essential for producing accurate financial statements that comply with generally accepted accounting principles (GAAP). They help provide a more accurate representation of a company’s financial performance and ensure that the financial statements are reliable for decision-making purposes.

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