Adjusting Entries EXPLAINED - By Saheb Academy

Summary

This video explains the concept of adjusting entries in accounting, focusing on four main types: outstanding expenses, prepaid expenses, accrued income, and deferred income. The instructor emphasizes the importance of following the accrual and matching concepts to ensure accurate financial reporting, even when some entries may be missed in day-to-day operations. By understanding these adjustments, such as accrued expenses and income, along with their various alternative names, viewers gain insight into how financial records are properly adjusted at the end of accounting periods. The video also highlights the difference between accrual and due dates, using salary payments as an example.

Takeaways

• 😀 Bookkeepers focus on day-to-day transactions but do not fully adhere to the accrual basis of accounting in real-world scenarios.
• 😀 Adjusting entries are used to ensure that the financial statements accurately reflect the actual financial position by recognizing expenses and revenues in the correct period.
• 😀 There are four main types of adjusting entries: outstanding expense, prepaid expense, accrued income, and deferred income.
• 😀 Outstanding expenses refer to costs that have been incurred but not yet paid (accrued expenses), while prepaid expenses are paid in advance for future goods or services.
• 😀 Accrued income refers to revenue earned but not yet received, and deferred income is money received for goods or services not yet delivered.
• 😀 Adjusting entries help in matching expenses and revenues to the appropriate accounting period, adhering to the accrual and matching concepts.
• 😀 The terms 'outstanding expense' and 'accrued expense' are interchangeable, as are 'prepaid expense' and 'deferred expense'.
• 😀 The concept of accrual involves recognizing income and expenses as they are earned or incurred, whereas 'due' refers to the actual timing of payment or receipt.
• 😀 A major example used in the script is salary, which is accrued daily as services are rendered but paid later, in the next accounting period.
• 😀 It's important to distinguish between accrual (the accumulation of income or expense over time) and due (the actual payment or receipt when the time arrives).

Q & A

What are adjusting entries in accounting?

Adjusting entries are journal entries made at the end of an accounting period to update the records for revenues and expenses that have been earned or incurred but not yet recorded. These entries help ensure that the financial statements are accurate and in line with the accrual basis of accounting.

What are the four main types of adjusting entries?

The four main types of adjusting entries are: 1) Outstanding Expenses (Accrued Expenses), 2) Prepaid Expenses, 3) Accrued Income, and 4) Deferred Income.

What is the difference between 'accrual' and 'due' in accounting?

Accrual refers to the process of recognizing revenue or expenses as they are earned or incurred, regardless of whether cash has been exchanged. 'Due' refers to the actual timing of payment or receipt, i.e., when the cash is actually paid or received.

Why might bookkeepers not follow the accrual basis 100% of the time?

Bookkeepers often simplify their work by not strictly adhering to the accrual basis, as they may not have access to all data or might focus only on day-to-day transactions. This can lead to some entries being missed, which are then adjusted by a senior accountant.

What is the role of a cashier in the accounting process?

The cashier typically handles cash transactions, recording the inflows and outflows of cash in a cash book. However, they do not have access to all accounting data and only focus on cash-related activities.

What is the matching concept in accounting?

The matching concept requires that expenses be matched with the revenues they help generate in the same period. This ensures that financial statements accurately reflect the true performance of a business.

What are 'accrued expenses' and 'prepaid expenses' also known as?

Accrued expenses are also called unpaid expenses or expenses payable, while prepaid expenses are known as deferred expenses, unexpired expenses, or expenses paid in advance.

What is the relationship between 'accrued income' and 'deferred income'?

Accrued income refers to income that has been earned but not yet received, while deferred income refers to income that has been received in advance but not yet earned. These concepts help ensure that income is recognized when it is earned, not when it is received.

What is the significance of adjusting entries for a business?

Adjusting entries are critical for ensuring that financial statements reflect the true financial position of a business. They help match revenues and expenses to the correct accounting period, thereby providing accurate financial information.

Can you explain the salary example used to illustrate accrual and due?

In the example, salary is earned daily throughout March, but it is not paid until April 7th, which is the due date for the payment. The accrual concept records the salary expense on March 31st, even though it is paid later, and the due date is when the cash payment occurs.