Some transactions are not documented accurately in a company’s accounting ledger when keeping financial records. To fix these records, the financial controller must make certain adjustments. A fiscal period might be monthly, quarterly, semi-annually, or annually. Companies generate financial records via journal entries, so the adjustments are made via journal entries. These adjustments are known as “adjusting journal entries.” These adjustments involve updating the financial transactions of a business by recording the appropriate amounts in the proper accounts.
How to apply the Adjustments
While certain transactions have not occurred at the end of a period, the accounting records are kept. A financial controller includes salaries in the monthly expenses, even if they are paid later. A post-paid electricity bill will be added to the costs for a month on the last day, even though the electricity company has not yet sent the invoice. Adjustments in financial accounting are essential for business managers to know the actual financial state of the business in terms of revenue and expenses. The accrual method of accounting requires a business to record expenses and revenue once services are rendered or received. Companies follow this practice when making or receiving payments for such services.
Adjustments in financial accounting could also be a strategy to correct some previously made errors in financial reports. For example, specific company revenue details are not documented in the financial statements. Adjustments in accounting offer the opportunity to make corrections to wrongly recorded details.
The essence of the adjustment is to convert cash transactions to the accrual accounting approach. Consider an engineering firm embarking on building a structure for a client, and this project lasts about four months. Assuming the firm’s revenue is due at the end of the four months, such income will have to be recorded monthly at the end of each month. The amount recorded each month is determined by the portion of the project completed. The financial controller will apply the required journal entries for the adjustment.
Adjustments are also applicable to accrued expenses. Accrued expenses are the expenses a company owes but have not been billed yet. Apart from accurals, deferrals are another type of adjustment in financial accounting. Deferrals relate to revenues and expenses collected or paid for in advance. When a customer pays for goods or services in advance, the company will delay revenue recognition until the goods or services are delivered. Adjustments for deferrals cover the period when a company has earned revenues or enjoyed a benefit for expenses to be accrued.
Relevance of Adjustments
The fundamental relevance of adjustments in journal entries is the accuracy they bring to a company’s financial records. Adjustments are made to financial records to ensure that transactions are captured appropriately to reflect the current financial state of the business. The preceding makes adjustments an integral part of the financial accounting procedures of companies. This improves the accuracy of the financial statements presented to the various stakeholders of the companies.