Adjustment Entries in Accounting
Adjustment entries are essential in accounting to ensure that revenues and expenses are recognized in the period they actually occur, in line with the accrual basis of accounting. Below are the most common types of adjustment entries with their journal entries:
1. Prepaid Expenses
When expenses are paid in advance but the benefit is yet to
be received, the unused portion is recorded as an asset.
Entry:
Prepaid Expense A/c
Dr
To Expense A/c
2. Accrued Expenses (Outstanding Expenses)
These are expenses incurred but not yet paid at the end of
the accounting period.
Entry:
Expense A/c
Dr
To Accrued
Liability A/c
3. Unearned Revenue (Deferred Revenue)
When cash is received in advance for services not yet
rendered, it is recorded as a liability.
Entry:
Revenue A/c
Dr
To Unearned
Revenue A/c
4. Accrued Revenue
Revenue earned but not yet received is recorded as
receivable.
Entry:
Accounts Receivable A/c
Dr
To Revenue A/c
5. Depreciation
Depreciation represents the reduction in the value of a
tangible asset over time.
Entry:
Depreciation A/c
Dr
To Accumulated
Depreciation A/c
6. Bad Debts Estimate (Allowance Method)
An estimated percentage of receivables that may not be
collected is recorded as an expense.
Entry:
Bad Debt Expense A/c
Dr
To Allowance for
Doubtful Accounts A/c
7. Bad Debt Write-Off
When a customer’s debt is confirmed as uncollectible, it is
written off against the allowance.
Entry:
Allowance A/c
Dr
To Accounts
Receivable A/c
8. Recovery of Written-Off Debt
If a customer makes payment after the account was written
off, the receivable is reinstated and then recorded as cash received.
Entry 1 (Reinstate A/R):
Accounts Receivable A/c Dr
To Allowance A/c
Entry 2 (Cash Received):
Cash A/c
Dr
To Accounts
Receivable A/c
9. Inventory Adjustment (Periodic System)
At the end of the period, inventory is adjusted to match the
actual physical count.
Entry:
COGS A/c
Dr
To Inventory A/c
10. Amortization
Amortization is the gradual reduction of the value of
intangible assets, similar to depreciation for tangible assets.
Entry:
Amortization A/c
Dr
To Accumulated
Amortization A/c
Key Takeaway:
Quick Reference Table: Adjustment Entries
|
Adjustment Type |
Journal Entry |
|
Prepaid Expenses |
Prepaid Expense A/c Dr
→ To Expense A/c |
|
Accrued Expenses |
Expense A/c Dr → To Accrued
Liability A/c |
|
Unearned Revenue |
Revenue A/c Dr → To
Unearned Revenue A/c |
|
Accrued Revenue |
Accounts Receivable A/c Dr → To
Revenue A/c |
|
Depreciation |
Depreciation A/c Dr →
To Accumulated Depreciation A/c |
|
Bad Debts Estimate |
Bad Debt Expense A/c Dr → To
Allowance for Doubtful A/c |
|
Bad Debt
Write-Off |
Allowance A/c Dr → To
Accounts Receivable A/c |
|
Recovery of Bad
Debt (Step 1) |
Accounts Receivable A/c Dr → To
Allowance A/c |
|
Recovery of Bad
Debt (Step 2) |
Cash A/c Dr → To
Accounts Receivable A/c |
|
Inventory
Adjustment |
COGS A/c Dr → To Inventory A/c |
|
Amortization |
Amortization A/c Dr →
To Accumulated Amortization A/c |
FAQs on Adjustment Entries
Why are adjustment entries important in accounting?
Adjustment entries ensure that revenues and expenses are recorded in the correct accounting period, providing an accurate picture of financial performance.
What is the difference between accrued expenses and prepaid expenses?
- Accrued expenses are incurred but not yet paid.
- Prepaid expenses are paid in advance for benefits yet to be received.
What is the difference between depreciation and amortization?
- Depreciation applies to tangible assets (e.g., machinery, vehicles).
- Amortization applies to intangible assets (e.g., patents, goodwill).
How is bad debt accounted for?
Bad debts are first estimated using the allowance method and later written off when confirmed. If recovered, the entry is reversed and cash is recorded.
What is the purpose of inventory adjustment?
Inventory adjustment ensures that the book value of inventory matches the physical count, helping in correct calculation of Cost of Goods Sold (COGS).
