Types of Adjustment
An adjusting journal entry is made to record any unrecognized income or expenses. There are four types: accrued revenues, accrued expenses, deferred revenues and deferred expenses. The main purpose is to ensure revenues are matched with expenses so financial statements reflect profitability.
Most transactions are eventually recorded through a supplier invoice or customer billing. Adjustments account for unrecorded expenses and unreceived revenues.
Examples of Adjustments
There are four types of account adjustments: accrued revenues, accrued expenses, deferred revenues and deferred expenses. Examples of adjustments include: altering the amount in a reserve account, recognizing revenue that has not yet been billed, deferring the recognition of revenue that has been billed but has not yet been earned.
After adjusting entries, an adjusted trial balance is prepared to check debits equal credits, ensuring accounts are ready for statements.
The two main types are accruals and deferrals. Accruals refer to owed payments or expenses, while deferrals refer to prepayments.