Adjusting Entries

In order for revenues and expenses to be reported in the correct period, companies make adjusting entries at the end of the accounting period. Adjusting entries ensure that the revenue recognition and matching principles are followed. Adjusting entries make it possible to report correct amounts on the balance sheet and on the income statement.

Adjusting entries are classified as either deferrals or accruals. Each of these classes has two subcategories.

Deferrals

1. Prepaid expenses:- Expenses paid in cash and recorded as assets before they are used or consumed.
2. Unearned revenues:- Cash received and recorded as liabilities before revenue is earned.

Accruals

1. Accrued revenues:- Revenues earned but not yet received in cash or recorded.
2. Accrued expenses:- Expenses incurred but not yet paid in cash or recorded.