Journal Entries Explained
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Journal Entries
Adjusting Journal Entry
To bring the financial statements in to compliance with the accounting framework such as GAAP, adjusting entries are made at the end of the accounting period. These entries are typically made to record accrued income, accrued expenses, unearned revenue and prepaid expenses.
Accrued expenses are any expenses you incurred but plan to pay for at a later date.
Examples of accrued expenses:
- Bonuses, salaries, or wages payable and related payroll taxes
- Unused vacation or sick days
- Cost of future customer warranty payments, returns, or repairs
- Unpaid interest expenses or accrued interest payable
- Utilities expenses that won’t be billed until the following month
- Anything you’ve purchased but haven’t received an invoice for yet
Prepaid expenses represent expenditures that have not yet been recorded by a company as an expense, but have been paid for in advance. Prepaid expenses are initially recorded as assets, because they have future economic benefits, and are expensed at the time when the benefits are realized (the matching principle).
Example of prepaid expenses:
Prepaid rent is rent paid in advance of the rental period.
Prepaid insurance is insurance paid in advance that has not yet expired as of the date of the balance sheet.
Accrued income is the money a company has earned in the ordinary course of business but has yet to be received, and for which the invoice is yet to be billed to the customer.
Examples of accrued income:
Interest Income earned on investments but cash has not yet been received.
Rent earned but not collected
Commissions earned but not received
Unearned revenue is advanced payments for goods and services not yet earned. It can be thought of as a "prepayment" for goods or services that a person or company is expected to supply to the purchaser at a later date.
Examples of unearned income:
Subscription-based products or other services that require prepayments.
Reversing Journal Entry
Made at the beginning of the accounting period, reversing journal entries are made to reverse or cancel entries that were made in the preceding period and are no longer required. Such as wage accrual which is replaced by an actual payroll expenditure.