Creating adjusting journal entries is an important step in accrual accounting. They are called “adjusting” journal entries because they are made before you generate your actual financial reports, thereby giving you a better understanding of your business’s true financial health. In this blog post, we’re going to cover the five most common types of adjusting journal entries and what they mean.
#1) Deferred Expenses
Deferred expenses are business-related expenses that you’ve already paid for but haven’t received. Whether it’s a product or service, if you pay for something related to your business’s operations and haven’t received it yet, it’s classified as a deferred expense, in which case it should be added as an adjusting journal entry.
#2) Accrued Expenses
Another common type of adjusting journal entry is accrued expenses. While deferred expenses refer to products and services that you’ve already paid for and haven’t received, accrued expenses are the opposite: they are expenses that you haven’t paid for but plan to. If you have a business loan, for example, an upcoming interest payment on the loan is an accrued expense.
#3) Deferred Revenue
There’s also deferred revenue, which is income generated by your business that you haven’t yet fulfilled. If a customer pays for a product or service in advance, you may record this payment as deferred revenue until you deliver the product or complete the service. Once you’ve fulfilled your obligation — either by delivering the product or completing the service — it’s no longer considered deferred revenue.
#4) Non-Cash Transactions
Non-cash transactions are financial transactions made by your business that don’t have any impact on your business’s cash. Some business owners non-cash transactions are simply transactions made using credit cards, debit cards or checks, but this isn’t true. They are actually financial transactions, such as equipment depreciation, that don’t affect your business’s cash.
#5) Accrued Revenue
Finally, accrued revenue is any income that your business has earned but haven’t received payment for. It’s not uncommon for businesses to allow their customers to pay after the product has been delivered or service has been completed. The business sends the customer an invoice, indicating how much he or she must pay and by when. Until the customer pays this invoice, however, the transaction should be recorded as an accrued revenue adjusting journal entry.
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