4. What is an Adjusting Entry?

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What even is an Adjusting Entry? Why do we have to make them?

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1Not completedCash vs. Accrual Accounting8 min
2Not completedExpense Recognition9 min
3Not completedAccruals and Deferrals16 min
4Not completedWhat is an Adjusting Entry?
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5Not completedAdjusting Entry: Supplies2 min
6Not completedAdjusting Entry: Wages5 min
7Not completedAdjusting Entry: Unearned Revenue3 min
8Not completedAdjusting Entry: Interest3 min
9Not completedContra-accounts5 min
10Not completedDepreciation8 min
11Not completedThe Closing Process11 min

Topic 4Practice Problems

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1Not completedAdjusting Entry IdentificationEasy
2Not completedClosing Journal AccountsEasy
3Not completedRevenue Journal EntryEasy
4Not completedRevenue RecognitionEasy
5Not completedRevenue RecognitionEasy
6Not completedAdjusting Entry - Salaries Payable Moderate
7Not completedAdjusting Entry - Wage ExpenseModerate
8Not completedClosing ProcessModerate
9Not completedDetermining Net Income From Journal EntriesModerate
10Not completedDetermining Net Income From TransactionsModerate
11Not completedPrepaid RentModerate
12Not completedRevenue RecognitionModerate
13Not completedAdjusting Journal EntriesHard
14Not completedAdjusting Journal EntriesHard
15Not completedRevenue and Expense RecognitionHard
16Not completedThe Effect of TransactionsHard
17Not completedWhen You Forget to do Adjusting EntriesHard
18Not completedYear End Closing & Account ClassificationHard
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Read Along With the VideoTranscript

I wanna talk just for a second about adjusting entries. I think this is one of those things that gets thrown around a bunch, and it's never really explained. They just say, "Well, make the adjusting entry," or, "Do the adjusting entry," but it's never explained what the heck is an adjusting entry. An adjusting entry is made because something changes.

We make adjusting entries because something has changed. We have an original entry, and then something changed here in the middle, so we need to make an adjusting entry. And the way that this typically works itself out in most of the problems you're gonna be looking at is time passes.

So you make an original entry, and then time passes, and as that time passes, you're using something up, you're earning something, something is changing. And so whenever the period ends, you have to make your adjusting entry to recognize what has actually changed. Let me give you an example. Let's say on July 1, you pay rent for the next year. So you're paying for July 1 all the way back around to July 1. So that's a prepaid rent, right? Because you're paying ahead of time. So if you pay $12,000 ahead of time, your prepaid rent goes up and your cash goes down. So what happens at the end of the year?

Because you have to close your books, which we'll talk about. Let's just say your teacher says, "Make the adjusting entry for December 31." And you say, "I have no idea what that means." Well, when you make an adjusting entry, it's because something changed or because time passed. So between July 1 and December 31, six months have passed, and this $12,000 is no longer prepaid rent, right? Because you paid it on 7/1, and you paid all the way out till 7/1 of the next year, but here we are on 12/31. So if we're standing at 12/31, we're looking back on six months, and we're looking forward to six months, right?

So we're looking forward, and this part is still prepaid. But as we're looking back, this is rent that we've used up, and so this becomes an expense because we've used it. We paid. They let us stay in the building. Now that time has passed, and it's gone. So all this becomes an expense.

So when your teacher says, "Make the adjusting entry," you think, "Okay, well, what has changed between the time I made the original entry and when she's asking me to make the adjusting entry?" Time has passed. And so you need to take your prepaid rent and reduce it by whatever amount. Here it happens to be six months, $6,000, and that $6,000 has been used up, so it becomes a rent expense.

So that's all that adjusting entries mean. Basically, you did a thing, and then the period ended, and you need to adjust the original thing that you did for the passage of time. We're gonna have a couple of videos of examples, but I just wanted to start by saying, "What in the world is an adjusting entry?" And it's the entry that you make to adjust the original entry for either the passage of time or something else changed, like you earned the revenue, you did the work, that sorta thing. And that's what the adjusting entry is good for. It's good for updating the original entry.