Adjusting of entries takes place at the end of accounting period. Adjusting entries is necessary because the dates on which actual transactions occur and thereby the dates of normal entries not always coincide with the date respective to the principles of accrual accounting and revenue recognition.
There are two categories of adjusting entries. One of the categories is deferred revenues and expenses. Such adjustments are needed in case there has been a cash flow in the past, but respective revenues or expenses must be recorded now. The second category is called accrued revenues and expenses. In this case there are some new account balances needed to be created in order to enlist assets or liabilities that were previously unrecorded. As for accrued expenses or revenues, it means that the cash flow will take place in the future, but revenue or expense must be recorded at the moment (Bushee).
Some accounts don’t require adjusting, these include cash, accounts receivable and accounts payable, fixed assets and capital. Cash, accounts receivable and payable are not affected since they’re related to transactions with outsiders and adjusting entries are purely internal transactions. The only adjusting entry in case of fixed assets is depreciation. Capital accounts, which show investments and withdrawals, are related only to net profit, which is not considered adjusting entry.
Example of accrued revenue entry: Dr. Accounts Receivable $10 000
Cr. Sales $10 000
This entry reflects a situation when a company accrues $10 000 of earned but unbilled revenue.
Example of deferred expense: Dr. Prepaid expenses $50 000
Cr. Rent expense $50 000
As for me, there’s no much difficulty in case of adjusting entries, though sometimes it may be difficult to understand which entries need adjusting and which don’t. Also the matter of depreciation and amortization may appear quite difficult as there are different tipes of accounting it.
References
Bushee, B. J. Adjusting entries. Lecture. Retrieved from https://www.coursera.org/learn/wharton-accounting/lecture/7hKg8/2-3-1-adjusting-entries-i
