Understanding Adjusting Journals, Functions, How to Make, and Example Questions

Adjusting journal is one of the bookkeeping stages in accounting and is a document that helps the preparation process financial statements. Financial statements in the company need to be reported at the end of each financial period such as the end of each month, every quarter, and every year.

Financial statements will be very important to the company because this document will affect every stakeholder – stakeholders such as investors and workers – within the company.

Adjusting entries will be a means of matching various input errors previously made when compiling the general ledger. Besides that, General journal also serves to adjust some accounts such as expenses or income that have not been recognized in a certain accounting period. Well, what exactly is this adjusting entry?

Understanding Adjusting Journals, Functions, How to Make, and Example Questions

Adjusting journal is one of the important documents in the preparation of financial statements. The following is DailySocial.id's explanation regarding the meaning, function, how to make, and examples of questions regarding adjusting journals. 

Definition of Adjusting Journal

According to Weygandt, J. J et al (2019), adjusting journals are journals that have a function so that the income that should have been obtained by the company is recorded in the period it should be, as well as so that the expenses of the company are calculated in the proper period.

Recording in adjusting journals is one of the important stages in accounting because with this journal, recording trial balance menjadi up to date and complete. Weygandt, J. J et al (2019) revealed that this incomplete recording was possible because of the following: 

• A certain account is not recorded on a daily basis because it will not be efficient if it is recorded that way. For example, the recording of increasing and decreasing products on inventory and acquisition employee salary.
• Some of the expenses that the company has run out with the passage of time. For example building rent and insurance
• The company may have items that have not been recorded. In for example there is a service charge that cannot be received until the next recording period.

Adjusting Journals will usually be made by the company every time the company will prepare financial statements. 

Adjusting Journal Function

In addition to having the main function of adjusting various transactions in the general ledger, adjusting journals also have several other functions. WellTherefore, let's look at a more detailed discussion regarding the function of the following adjusting journals:

• The first function of adjusting entries is to determine the revenue and expense accounts with adjustments that occur during the accounting period. That way the nominal account (income and expenses) will have a value equal to up to date.
• To adjust the recording of equipment accounts that have a consumable life
• Calculate depreciation or depreciation in value of fixed asset accounts that occurred during the current period.
• Recording expense accounts that are past due or when they are classified as expense receivables that need to be paid in advance
• The company can adjust the payment of debt expenses where the company has used the service but has not paid for the service.
• Knowing the value of the accounts in the general ledger, thus making financial statement reporting easier
• With adjusting entries, we can find out the real value of an asset or other account as time passes. For example, the company can find out the value of assets after depreciation (depreciation).

How to Create and Sample Adjusting Journal Questions

Adjusting entries are usually made after an unadjusted trial balance is available. After creating the trial balance, you need to do an analysis on each account that needs to be adjusted.

To make things easier, you need to track transactions related to the account that needs to be adjusted. WellAfter that, all you have to do is compile a journal by calculating the changes in the account.

What exactly are the accounts that need to be adjusted? The following are the accounts that usually exist in adjusting journals along with examples of questions and their recording.

Prepaid Expenses

One of the accounts that needs to be adjusted at the end of the accounting period is prepaid expenses. Although the name begins with "expenses", prepaid expenses are one of the accounts that are included in the asset or asset class. This happens because expenses – such as insurance, rent, etc. – are paid before we enjoy the benefits attached to these expenses.

Well, over time, the benefits of this prepayment will disappear and the prepaid expense account needs to be adjusted to an expense class account. With adjusting entries, you are able to calculate the real value of the assets you own. The following is an example of a question regarding prepaid expense accounts:

In the trial balance, there is an account for prepaid rent of IDR 4000.000,00. At the end of the recording period, the prepaid rent account turned out to be only Rp. 3000.000,00. With this calculation we know that the balance of Rp. 1000.000,00 needs to be adjusted to the rental expense. Here's the record.

Equipment

Equipment is an account that belongs to the class of assets or assets or can also be called assets. Items included in this equipment account are items purchased for the company's operational needs – but not resold – and have a service life of less than one year.

At the end of the accounting period, the equipment account needs to be adjusted to determine the real value of the equipment. The calculation of the equipment account is usually done by calculating the physical remaining equipment that still exists. The following is an example of a question for an adjusting entry for an equipment account.

The equipment account for a company has a balance of $5.000.000,00. After the end of the accounting period, it turns out that the remaining equipment has a value of Rp. 3.300.000,00. Thus, the equipment balance of Rp. 1.700.000,00 needs to be adjusted to the equipment expense account. Below is the record.

Revenue Receivable

The account that needs to be adjusted at the end of the next accounting recording period is income receivables. Revenues receivable is an account where the company has an income that has become their due, but the income has not been received in full by the company. 

The adjusting journal entry for this transaction is an example of the problem as follows.

Company X sells service products on credit worth Rp. 5.000.000,00. Thus, the company needs to add Rp. 5.000.000,00 as an expense account. The record is as follows.

Prepaid income

Next, another account that needs to be adjusted is unearned income. This unearned income account occurs when consumers make payments first, but have not received services or goods that have become their rights.

For the company side, this unearned income is recognized as a debt not as “income”. This is because the company still has an obligation to fulfill orders from consumers.

Well, adjusting entries are required when the company has fulfilled part or all of their obligations. Later, the amount of unearned revenue will be recognized as service income after the company has paid its debt through adjusting entries. The following is an example of questions and records for the unearned income account.

Company Y has an unearned income account balance of $8.000.000,00. At the end of the accounting period, it turns out that the company has paid off services to consumers in the amount of Rp. 3.500.000,00. Thus, the company still has an income debt of Rp.4.500.000,00.

Equipment Depreciation

Another thing to check in preparing adjusting entries is company equipment. Equipment is defined as items purchased by a company not to be resold and have a service life of more than one year.

Depreciation on equipment needs to be recorded at the end of the recording period so that the company knows the real value of the equipment. The following is an example of a question related to depreciation of equipment. Company Z has equipment whose value has decreased by Rp. 2000.000,00 from the previous Rp. 5000.000,00. This means that the equipment still has a value of IDR 3.000.000,00. The records of this case are as follows.

Adjusting entries help with adjustments financial statements be more accurate. Through this journal, companies can make adjustments to accounts such as income and expenses with real and value updated.

Well, that was a discussion about adjusting journal entries in accounting. Hopefully this article will help you in recording one of these journals!

Reference:

Weygandt, JJ, Kieso, DE, Kimmel, PD, Trenholm, B., Warren, V., & Novak, L. (2019). Accounting Principles, Volume 2. John Wiley & Sons.