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Oct 30 2012

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What is Adjusting Journal Entry

adjusting journal entry, journal entry, purpose of adjusting journal entryAdjusting journal entry is a journal entry prepared to adjust account balances. Adjusting journal entries are journal entries made at the end of the accounting period to allocate revenue and expenses to the period in which they actually are applicable. An adjusting journal entry always involves an income statement account (revenue or expense) and a balance sheet account (asset or liability). Adjusting journal entry is necessary because a single transaction may affect revenues or expenses in more than one accounting period and also because all transactions have not necessarily been documented during the period.

Purpose of Adjusting Journal Entry

Adjusting journal entry is made, for getting accurate account balances from the final accounts. Business organizations made mistakes in preparing journal entries in the past business transactions and their books of records are not updated to reflect new financial transactions or amount changes in previous business transactions. Therefore, Adjusting journal entries are usually made at the end of an accounting period to update account balances to reflect correct account balances as of the balance sheet date. Matching principle reflects in revenues and expenses between accrual basis and cash basis accounting that are corrected by adjusting journal entries.

Example of Preparing Adjusting Journal Entry

Example: ABC Corporation sold its products at the price of $5,000 for cash. However, this transaction was recorded as $500 at the time of sales. The adjusting journal entry to be made to correct this transaction would be as follows:

Step 1: Identify the original journal entry that has been made during the period.

Particulars Debit ($) Credit ($)
Cash 100  
Sales   100

Step 2: Identify the correct account balances.

Particulars Debit ($) Credit ($)
Cash 1000  
Sales   1000

Step 3: Analyse the differences between correct and current balances and prepare journal entries to adjust such differences. 

Particulars Debit ($) Credit ($)
Cash 900  
Sales   900

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