How to Adjust Entries & Their Effect on Accounting Periods to Come
- 1). Determine the transaction that needs to be recorded. For example, if a business is holding onto a financial instrument and receives coupons on a biannual basis, that business needs to record the interest revenue accruing for each time period that it holds onto the financial instrument.
- 2). Estimate the value of the transaction in question. For most adjusting entries, this is based on the business's prior experiences. For example, if the business receives a $120 interest coupon on a biannual basis, it can estimate its interest revenue in each month to be $20. For another example, if the business rents its building for $2,000 a month but has not received the bill for the month, it still needs to record rent expense at the month's end and knows based on its past experience that the expense is $2,000.
- 3). Record the transaction in question on the ledger. How adjusting entries are recorded depends on what the adjustments are made to. It is important to remember that an increase to a revenue is a credit while an increase to an expense is a debit and vice versa. For example, if the business is recording that it has made $20 in interest revenue, it records that as a $20 debit to interest receivable and a $20 credit to interest revenue.
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