At the end of the year, most companies perform adjusting entries to update the books before closing them. If your company uses a computerized accounting program, make the entries directly into the system. If you manually record entries, make them in your company’s general ledger. There are several types of adjusting entries that must be completed before the books are closed and they include adjusting four different categories: prepaid expenses, unearned revenues, accrued revenues and accrued expenses.
Calculate prepaid expense entries. Prepaid expenses occur when you pay an expense before you use it. Two common examples of this are prepaid insurance and prepaid rent. For example, if you purchase an annual insurance policy on July 1 and pay for the entire policy, you must account for the months used within the year when you perform adjusting entries.
Perform the journal entry. If the policy cost $1,200, you used $600 of it. Post this by debiting insurance expense for $600 and credit prepaid insurance for $600.
Determine if there are any unearned revenues. These occur when you receive money before it is earned. For example, if a client pays you for services that cover three months, you must adjust the amount each month or at the end of the year.
Perform the journal entry. If the client hired you on Dec. 1 and paid you $3,000 for these services, create an entry that accounts for using up one month of the services as of Dec. 31. Make the entry by debiting unearned revenue for $1,000 and crediting revenue for $1,000.
Update any accrued revenues. At the end of the year, you must update any revenues your company earned, but for which it has not yet paid. If your company finished a project during December, it must be billed by the end of the month to reflect during the appropriate period.
Journalize the entry. For example, if the project cost $3,000, update the records by performing an adjusting entry. Record it by posting $3,000 as a debit to accounts receivable and as a debit to revenue.
Look for any accrued expenses. An accrued expense involves expenses that have occurred, but have not been paid for.
Perform the journal entry. If you hired a computer repairman and the bill is $500, you must post this entry even though you will not pay for it until later. Journalize it by posting $500 to computer expense and $500 to accounts payable.
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