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Prepaid expenses are goods or services that have been paid for by a company but have not been consumed yet. This means the company pays for the insurance but doesn\u2019t actually get the full benefit of the insurance contract until the end of the six-month period. This transaction is recorded as a prepayment until the expenses are incurred. Only expenses that are incurred are recorded, the rest are booked as prepaid expenses.<\/p>\n
Adjusting journal entries are used to reconcile transactions that have not yet closed, but which straddle accounting periods. These can be either payments or expenses whereby the payment does not occur at the same time as delivery.<\/p>\n<\/div><\/div>\n<\/div>\n
To transfer what expired, Insurance Expense was debited for the amount used and Prepaid Insurance was credited to reduce the asset by the same amount. Any remaining balance in the Prepaid Insurance account is what you have left to use in the future; it continues to be an asset since it is still available. For example, if you place an online order in September and that item does not arrive until October, the company you ordered from would record the cost of that item as unearned revenue. The company would make adjusting entry for September debiting unearned revenue and crediting revenue. Once you complete your adjusting journal entries, remember to run an adjusted trial balance, which is used to create closing entries. Depreciation is always a fixed cost, and does not negatively affect your cash flow statement, but your balance sheet would show accumulated depreciation as a contra account under fixed assets.<\/p>\n
The balance in the unearned revenue account was $5,000 at the beginning of the accounting period. Learn the definition of adjusting entries in accounting, and find examples. Explore the various types of adjusting journal entries, and examine how to do them.<\/p>\n
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According to the matching concept, the revenue of the current year must be matched against all the expenses of the current year that were incurred to produce the revenue. The process of recording such transactions in the books is known as making adjustments. An adjustment can also be defined as making a correct record of a transaction that has not been entered, or which has been recorded in an incomplete or incorrect way. In other words, we are dividing income and expenses into the amounts that were used in the current period and deferring the amounts that are going to be used in future periods.<\/p>\n
The number and variety of adjustments needed at the end of the accounting period differ depending on the size and nature of the business. Therefore, the entries made that at the end of the accounting year to update and correct the accounting records are called adjusting entries. The updating\/correcting process is performed through journal entries that are made at the end of an accounting year. Similarly, under the realization concept, all expenses incurred during the current year are recognized as expenses of the current year, irrespective of whether cash has been paid or not. Also, according to the realization concept, all revenues earned during the current year are recognized as revenue for the current year, regardless of whether cash has been received or not.<\/p>\n
Unlike accruals, there is no reversing entry for depreciation and amortization expense. Depreciation and amortization are common accounting adjustments for small businesses. No matter what type of accounting you use, if you have a bookkeeper, they\u2019ll handle any and all adjusting entries for you.<\/p>\n