Every company makes adjustments to their entries at the end of each accounting period. This enables them to allocate expenses and revenue to their applicable periods. Adjusting of entries require principles, especially in accrual accounting. This cannot be achieved with the actual records with dates and transactions, it is therefore very essential to adjust entries at every year end. This paper will explore the need for adjustments of entries in accounting; types of adjusting entries, examples, and its usage in computerized accounting as well as ethical issues that would result from such entries (Averkamp, 2011, p. 1).
Why adjusting entries are necessary
Adjusting entries is very important for businesses because it reflects changes in revenue and expenses which are usually volatile. Each day transactions are made and this keeps the revenue changing, if adjusting entries are not done, cash balances as well as other accounts like receivable accounts will show wrong values. For instance, if a buyer purchases an item costing $400 and the transaction is recorded in the sales along with receivable accounts. Then it happens that the customer pays $300 at the end of that month, these adjustments must be made so that the company receives $300 for that item. Otherwise, the accounts will reflect wrong figures at the end of a trading period. In addition, for calculation of accruals, and to apply its principles, correct dates and transaction must be placed; this necessitates adjusting of entries at the end of every trading period (Averkamp, 2011, p. 1).
Types of adjusting entries and manufacturing industry example
There are two main forms of adjusting entries namely, Deferrals adjusting entries and accruals adjusting entries. The latter is usually done to expenses and revenues in cases where a transaction has occurred but has not been entered in the records. This must then be entered to reflect on the balance sheet as well as the income statement. On the other hand, deferrals are usually done to fix transactions that have already occurred and recorded and happen to be done between two or even more accounting periods, this call for spread of the amount. These are then categorized in four ways as follows, Accrued expenses, Deferred Revenue, Accrued Revenue and deferred expenses (White, 2011, p. 1).
This is commonly done on accounts receivable, for example, if a company that manufacture computers sells some to a wholesaler and is to receive $4000, but this is not paid by the end of the month, records will show $4000 in the accounts receivable for each. When the wholesaler [pay the following month, this has to be adjusted in the cash and receivable accounts (White, 2011, p. 1).
This is done to account payable account, for instance, if the manufacturing company contracts another group to supply computer chips to them, and then the supplier brings in chips worth $5000, and they are not paid by the end of that month, expense account and account payable will be entered. When this amount is paid, the following month, account payable will be adjusted and cash account entered (White, 2011, p. 1).
In this method, let’s take an example of a software company, which buys software from a private developer and makes many copies to sell. If they pay the developer $12000 for the software per year, and makes 100copes every month, then they will have $ 100,000 every month. We shall debit cash by $12000 and credit unearned software revenue by the same amount. To make articulation.we debit unearned software revenue by $100,000 and credits software revenue by $100,000 (White, 2011, p. 1).
In deferral expenses, transactions have taken place, but requires allocation for each accounting period (spread), for instance if the manufacturing company pays $1200 insurance twice per year, and they pay in January and June, cash will be released in January of $600, which has to be adjusted on prepaid insurance account. After which, this has to be spread on each month by debiting insurance expense account and crediting cash account each month by $ 100 (White, 2011, p. 1).
How these entries would be recorded in a computerized accounting system
First one needs to put together all the required documents for adjusting entries, then a list of all the required adjusting entries should be made, this can be made easier by grouping these entries by their accounts. After grouping, one should add all the totals for both debit and credit to ensure that they balance (this will be used to compare with the computer generate report). Key the adjusting entries and print the computer report, finally you can check for errors and post to general ledger, only if one is certain that there are no errors (Demand Media, Inc., 2011, p. 1).
Ethical issue that could result from the preparation of manufacturing entries
Ethical issues associated with adjusting entries arise when dealing with inapplicable entries, for instance, spreading expenses and unearned revenue does not seem ethical even though their inclusion helps balance the accounts. Transactions that are completed keeps resurfacing in the name of adjusting entries. It does not seem ethical (Gitomer, 2009, p. 1).
Companies need to adjust their journal entries due to the changes in expense, cash, account payable and account receivable entries before preparing balance sheet and other statements. Adjustment entries are therefore very essential for businesses and provide accurate financial statements (Demand Media, Inc., 2011, p. 1).
Averkamp, H. (2011). Adjusting Entries. Accounting coach.com. Web.
Demand Media, Inc. (2011). How to Prepare Adjusting Entries. eHow.com. Web.
Gitomer, J. (2009). Adjusting Entries. Jerry-the-bookkepper.com. Web.
White, M. (2011). Accounting Tutorial: Accruals and Deferrals. Middlecity. Com. Web.