Adjusting Entries

Certain end-of-period adjustments must be made when you close your books. Adjusting entries are made at the end of an accounting period to account for items that don't get recorded in your daily transactions. In a traditional accounting system, adjusting entries are made in a general journal.

Some adjusting entries are straightforward. Others require judgment and some accounting knowledge. You will have to decide if you are going to tackle some or all adjusting entries, or if you want to pay your accountant to do them. If your accountant prepares adjusting entries, he or she should give you a copy of these entries so that you can enter them in your general ledger.

The following are situations requiring adjusting journal entries. Some, but not all, should apply to your business:

• Accrue wages earned by employees but not yet paid to them.
• Accrue employer share of FICA taxes due.
• Accrue property taxes.
• Record interest expense paid on a mortgage or loan and update the loan balance.
• Record prepaid insurance.
• Adjust your books for inventory on hand at period end.
• Accrue interest income earned but not yet received.
• Record depreciation expense.
• Adjust for bad debts.
• Accrue dividends payable if a corporation.
• Accrue income taxes payable if a corporation.
• Account for the sale of fixed assets.
• Set up accounts receivable balance if your day-to-day books are maintained on a cash basis.
• Set up accounts payable balance if your day-to-day books are maintained on a cash basis.

After all adjusting entries are made, do the following to complete your books for the accounting period:

1. Foot the general journal.
2. Post the general journal totals to the general ledger.
3. Foot the general ledger accounts to arrive at the final, adjusted balance for each account.
4. Prepare an adjusted trial balance using the general ledger balances.
5. Prepare financial statements using the adjusted trial balance.