What Is Adjusting Entries In Accounting?

In the fuel oil example given in the Prepaid Expense section, the $900 payment to the fuel oil dealer in January requires a credit to Cash and a debit to Fuel Oil Inventory. During February, March, and April, no outside record calls your attention to the need for the entries debiting Fuel Oil Expense and crediting Fuel Oil Inventory.

Many entries required to apply the accrual principle are easy to overlook if you do not set up procedures for them. Accounts recognizes this possibility and provides for a series of entries, made at the end of the month, to enter the effect of accruals. These entries are called adjusting entries. They adjust the accounts so the amounts reported as expenses and revenues for the period reflect the actual decreases and increases in equity during the period and so the balance sheet amounts reflect the current financial condition (subject to the shortcuts discussed earlier).

Some of these entries are "standard"; that is, if the entity purchases a one-year insurance policy for $1,200, there is an expense of $100 for the insurance protection provided in each of the next 12 months. Once you enter this fact, the program makes this monthly entry automatically. Automatic journal entries ensure that the entry is not overlooked, which can happen in a manual system.