What are Adjustment entries? What is an Adjusted Trial Balance?
Accounting adjustments are journal entries or adjusting entries. They are prepared to adjust and close off the ledger account balances.
The accounting ledgers are then ready for the final reports to be prepared for the ‘balance day‘ of the end of the accounting period. Because of this, accounting adjustments are often called ‘balance day adjustments‘.
There are many types of accounting adjustments, here are some examples.
- Closing Entries: Revenue and expense ledger accounts are closed off each period to the Profit and Loss Ledger account. Asset, Liability and Equity accounts carry forward each financial period, and so they are not closed off.
- Revaluations: Adjustments are made where assets the business hold increase in value to ensure that assets are valued at market rates
- Depreciation and Impairment: Calculations and adjustments are made to take in to account the depreciation and impairment of assets.
- Prepayments and Accruals: Adjustments are made to recognise prepayments and accruals to ensure that irrespective of the cash received and paid, the correct revenues and expenses are recorded. This ensures that the true expenses of the period are matched to the revenues earned.
- Provisions and Allowances: Journals are created where there is a need to recognise an obligation or allow for a probable cost to the business. Examples are possible doubtful debts or accrued leave owed to employees.
Once these adjustments are completed, the adjusted trial balance and the financial reports can be prepared.
Because of the complexity, preparing adjustment journal entries requires accounting skills and a knowledge of depreciation methods. Often a bookkeeper passes the accounts to accountant for this step.
Now to learn more about the complicated topic of prepayments and accruals, take this Prepayments and Accruals Tutorial Course Closing Entries Tutorial Course
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