Appropriate adjusting entries turn your books from a simple list of transactions into a far more accurate reflection of how your business is doing. You may think that as long as someone is recording every sale you make and every expense you pay, you’re doing well. But some important items don’t get into the books simply by recording daily transactions.
You (or your bookkeeper) may or not may not know what adjusting entries need to be made and how to calculate them. That’s why so many businesses rely on their accountants for this important function.
Here are a few of the adjustments that should be entered into your books at the end of every accounting period:
Accrued expenses – These include wages earned but not yet paid. For example, if you issue paychecks for the last half of September on the 5th of October, you’ve accumulated an expense that needs to be reflected in September. The only way to show this is with an adjusting entry — a debit to Wages Expense and a credit to Wages Payable (or Accrued Wages).
Prepaid expenses – If you write a check in September to pay for October’s business insurance, that expense should be shown in October. But unless an adjusting entry is made, it may show up in September.
Depreciation Expense – Since this is a non-cash expense, there is no function that gets this amount into your books unless you put it there. Generally, your accountant gives you these figures so that you can enter them into your books.
These are just a few of the adjusting entries that most companies need to make every month. The specific entries depend on your business. If you’re not recording adjustments before closing the books each month, you should consult with your accountant.