Adjusting Journal Entries and Financial Statements
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Adjusting Journal Entries and Financial Statements

What you should know before adjusting journal entries and financial statements for your small business.

At the end of an accounting period, most of the account balances on the ledger can simply be transferred to the financial statements without change. However, some transactions may need to be adjusted or updated. There are several reasons why this may be so. In this article, I hope to go over the reasons why balance sheets will need to be updated or adjusted for your small business.

Not all expenses are recorded every day in a small business. Some small expenses for your business, such as the use of supplies, would be tedious to record on a daily basis. The daily use of supplies would probably be recorded in miniscule amounts. It is usually not necessary for mangers to know exactly what supplies are on hand on a daily basis. At the end of the accounting period, the supplies are usually added up and recorded. This would most likely be recorded in an account called "supplies expense." In this situation we would usually debit supplies from Owner's Equity and credit "Supplies" under "Assets."

For a small business, some expenses are incurred as time passes. For example, if you pay for insurance over the course of a year, the insurance would "expire" as time passed. Prepaid insurance expires, and becomes an expense as time passes. If you received rent in advance, you have not really earned the rent yet. In both of these cases, there would be one or more accounts that would need adjustments.

For a small business that has several expenses which have not been recorded yet at the end of the accounting period. For example, let's see you own a delivery company. If the service is provided, and will not be billed until the next accounting period, we would still need to account for the service provided. Just because cash is not yet received, does not mean we can forget about the service which was performed. This adjustment would most likely be recorded in "fees earned" and "accounts receivable."

It is always important to analyze everything that happens during the accounting period before you prepare the final financial statements. When starting up a small business, it is important to prepare detailed financial statements. Preparing these statements can contribute to the future success of your small business. Once financial statements are prepared, you or your managers will be able to analyze the accounts to make informed business decisions.

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