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Sign up for a trial of Bench. No pressure, no credit card required. For Partners. Contents What is an adjusting entry? Why make adjusting entries? Who needs to make adjusting entries? The five types of adjusting entries. Tired of doing your own books? Try Bench. Share this article. Get Started. In this case, adjusting entries are needed to accurately keep track of what you earned during the accounting period. Accrued expenses.
It is necessary to record all expenses accrued during an accounting period. There will be times when an expense is accrued but has not been paid out. In that situation adjusting entries are needed. For example, if you own a restaurant you likely receive deliveries from vendors on a regular basis.
As you build trusted relationships with your vendors, you may receive delivery of products and get billed for them at a later date. In this case, you may have an arrangement with a supplier to earn a quarterly rebate based on your overall spend with that supplier. Imagine the supplier's policy is to pay the rebate at the end of the year. Then, from an accounting perspective, this may need to be accrued for when the rebate is earned, not when it is received.
When preparing the entry, it's helpful to reference your company's policy and procedure to ensure compliance, and it's best practice to attach supporting documents to the journal entry, like the contract and terms. This will help speed up the approval process, as well as any audit work later on.
BlackLine Journal Entry automates the process for creating and managing adjusting journal entries. It provides an integrated system for the creation, review, approval, and posting of adjusting journal entries. Journal entry templates ensure standardization across the organization, and validation rules check entries for errors before posting. Advanced features include the automatic creation of journal entries through cloning of recurring journal entries or import of journal and journal lines from report writers or spreadsheets.
It also provides integrated storage of supporting documentation, links to policies and procedures, and automatic posting and status tracking for real-time updates.
BlackLine Account Reconciliations integrates with Journal Entry to automate and streamline the account reconciliation process. This gives accounting teams more time to analyze and book any necessary adjusting journal entries.
This solution also simplifies the process of handling prepaid amounts. It includes an amortizable prepaid template that records the original amount, open date, and the dates amortization should begin and end. Amortized amounts are automatically calculated based on this information. The amounts can also be manually updated if there is a change to the balance or if an item should not be amortized on a straight-line basis.
Here are examples on how to record each type of adjusting entry. Any time that you perform a service and have not been able to invoice your customer, you will need to record the amount of the revenue earned as accrued revenue.
For example, John owns a cleaning service. He bills his clients for a month of services at the beginning of the following month. The journal entry is completed this way to reverse the accrued revenue, while revenue entry remains the same, since the revenue needs to be recognized in January, the month that it was earned.
Accruing revenue is vital for service businesses that typically bill clients after work has been performed and revenue earned. Payroll is the most common expense that will need an adjusting entry at the end of the month, particularly if you pay your employees bi-weekly.
Any hours worked in the current month that will not be paid until the following month must be accrued as an expense. Here is the journal entry for recording accrued payroll expenses:.
Be aware that there are other expenses that may need to be accrued, such as any product or service received without an invoice being provided.
For example, your business offers security services. Since the revenue has not yet been earned, it has to be deferred. Here is the journal entry for recording the initial payment:. If you receive payment in advance for services that have not yet been performed, the payment must be posted as deferred revenue, with a monthly journal entry necessary until the prepaid revenue has been earned.
Prepaid expenses are handled like deferred revenue. Your initial journal entry would look like this:. Common prepaid expenses include rent and professional service payments made to accountants and attorneys, as well as service contracts. Any time you purchase a big ticket item, you should also be recording accumulated depreciation and your monthly depreciation expense.
To record depreciation , your journal entry would be:. This journal entry can be recurring, as your depreciation expense will not change for the next 60 months, unless the asset is sold.
Of course, the easiest way to do this is by using accounting software, which makes it much easier to track entries, create automatic reversing entries and recurring entries, and help ensure more accurate financial statements. Once you complete your adjusting journal entries, remember to run an adjusted trial balance , which is used to create closing entries. In order to have an accurate picture of the financial health of your business, you need to make adjusting entries.
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