Even though you’re paid now, you need to make sure the revenue is recorded in the month you perform the service and actually incur the prepaid expenses. If you’re paid in advance by a client, it’s deferred revenue. In March, when you pay the invoice, you move the money from accrued expenses to cash, as a withdrawal from your bank account. In February, you record the money you’ll need to pay the contractor as an accrued expense, debiting your labor expenses account. However, they don’t invoice you until early March. You agree in advance to pay them $400 for a weekend’s work. Suppose in February you hire a contract worker to help you out with your tote bags. They account for expenses you generated in one period, but paid for later. Once you’ve wrapped your head around accrued revenue, accrued expense adjustments are fairly straightforward. Then, when you get paid in March, you move the money from accrued receivables to cash. First, during February, when you produce the bags and invoice the client, you record the anticipated income.įor the sake of balancing the books, you record that money coming out of revenue. In your general ledger, the adjustment looks like this. (Remember: Revenue minus expenses equals income.)įirst, you make an adjusting entry, moving the revenue from a “holding account” (accrued receivables) to a revenue account (revenue.) Then, on March 7, when you get paid and deposit the money in the bank, you move the money from revenue to cash. To accurately reflect your income for the month, you need to show the revenue you generated. You incurred expenses making the bags-cost of materials and labor, workshop rent, utilities-in February. In February, you make $1,200 worth for a client, then invoice them. When you generate revenue in one accounting period, but don’t recognize it until a later period, you need to make an accrued revenue adjustment. Here are descriptions of each type, plus example scenarios and how to make the entries. If making adjusting entries is beginning to sound intimidating, don’t worry-there are only five types of adjusting entries, and the differences between them are clear cut. If you don’t have a bookkeeper yet, check out Bench-we’ll pair you with a dedicated bookkeeping team, and give you access to simple software to track your finances. If you have a bookkeeper, you don’t need to worry about making your own adjusting entries, or referring to them while preparing financial statements. But you’re still 100% on the line for making sure those adjusting entries are accurate and completed on time. And it will likely generate financial statements for you. The software streamlines the process a bit, compared to using spreadsheets. If you use accounting software, you’ll also need to make your own adjusting entries. Then, you’ll need to refer to those adjusting entries while generating your financial statements-or else keep extensive notes, so your accountant knows what’s going on when they generate statements for you. If you do your own bookkeeping using spreadsheets, it’s up to you to handle all the adjusting entries for your books. bookkeepersĪdjusting entries will play different roles in your life depending on which type of bookkeeping system you have in place. No matter what type of accounting you use, if you have a bookkeeper, they’ll handle any and all adjusting entries for you. If you do your own accounting and you use the cash basis system, you likely won’t need to make adjusting entries. If you do your own accounting, and you use the accrual system of accounting, you’ll need to make your own adjusting entries. In the accounting cycle, adjusting entries are made prior to preparing a trial balance and generating financial statements. Making adjusting entries is a way to stick to the matching principle-a principle in accounting that says expenses should be recorded in the same accounting period as revenue related to that expense. If you granted the discount, you could post an adjusting journal entry to reduce accounts receivable and revenue by $250 (5% of $5,000). Instead, you make a new entry amending the old one.įor example, going back to the example above, say your customer called after getting the bill and asked for a 5% discount. To make an adjusting entry, you don’t literally go back and change a journal entry-there’s no eraser or delete key involved. Then, in September, you record the money as cash deposited in your bank account. In August, you record that money in accounts receivable-as income you’re expecting to receive. Here’s an example of an adjusting entry: In August, you bill a customer $5,000 for services you performed. Journal entries track how money moves-how it enters your business, leaves it, and moves between different accounts. Specifically, they make sure that the numbers you have recorded match up to the correct accounting periods. Adjusting entries are changes to journal entries you’ve already recorded.
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