Adjusting entries transform the accounting records of the company into accrual basis of accounting. They are made at the end of the accounting period to adjust the income and expenses to the period to which they pertain.
Revenues or expenses that are accrued by the company but are not yet paid or received are regarded as accruals. The company needs to make an adjusting entry of interest income that has been earned in 2015, but the actual payment will not be received until 2016 (Annual Report 2014: Wal-Mart, 2014). The company would require making an adjusting entry in the period in which interest was earned.
Other elements that require adjusting entry for accrual include accrued liabilities and accrued income taxes. These are the expenses that were incurred by the company in 2015 but have not yet been paid. The company would need to make an adjustment entry at the time of payment of these expenses.
Adjusting entries are also made for the deferrals of expenses or revenues. Deferred expenses or expenses are those elements that are recorded in 2015, but the amount needs to be split between two or more periods. The prepaid expenses recorded by the company are those that were paid in 2015 for expense coverage of next accounting period. A deferred entry should be made to show the expense in the period in which it actually pertains.
Interest income in income statement will require adjusting entry at the time when it will be received. Similarly, the income that is deferred by the company, such as deferred income from continuing operations, will need to be adjusted in the period when it will be received by the company (Flood, 2014).
References
Annual Report 2014: Wal-Mart. (2014). Arkansas: Wal-Mart.
Flood, J. M. (2014). Wiley GAAP 2015: Interpretation and Application of Generally Accepted Accounting Principles 2015. Hoboken: John Wiley & Sons.
