Adjustment Transaction

* The reasons because in accounting we have to make adjustment at the end of period

There are two mains reasons because in accounting make the adjustment at the end of the period, the first reason is that sometimes transactions take place in one period but impact in another transactions and the second reason is also sometimes you know a transaction will be finalized in the future, but atleast some part of it has ties to the current period.

These two situations are the main reason for adjusting entries, which are entries that account for transactions that occur in one period but affect another. You have to record these out-of-time entries as you get ready to close one accounting cycle to make sure they have been included in the right period.

* Kind of Adjustement entriesThe two main types of adjusting entries are deferrals and accruals. These are mostly used in accrual basis accounting systems, but some entries can apply to people who use the cash basis as well, depreciation is the most common example. Accrual entries are used to record transactions that haven't actually happened yet, at least on the money side (these will be explained in more detail in the nextsection). Deferral entries are pretty much the opposite: they record expenses that you paid in advance but haven't incurred until now, or revenues that you've been paid for already but haven't yet earned.

Deferral entries are sort of like postponed transactions, the money part has already happened, but the income statement impact was put off until later. Remember those two balance sheetaccounts, prepaid expenses and unearned revenues, here is where these two accounts make a transformation from balance sheet to income statement. Prepaid expenses turn into current expenses, and unearned revenues turn into current revenues.

Insurance expense is a perfect example of a prepaid expense. You probably paid your business insurance premium in one lump at the beginning of the year, but thatcoverage isn't just for the month you sent the check; it's for the whole year. When you paid the bill, you made an entry in the prepaid insurance account. Now you have used up part of that premium, and you have to make an adjusting entry to reflect that. Depreciation is another major form of expense deferral, and it is recorded as part of the adjusting entries.

The flip side of prepaid expense isunearned revenue, meaning that a customer has paid you for something you didn't do yet. Any time a customer gives you a down payment, a deposit, an advance, or a retainer, they all hit the same unearned revenue account. When you got that advance money, you recorded a liability on your books, what you owed was goods or services instead of money. Now, when you have completed the work or deliveredthe product, that revenue has been earned. An adjusting entry is called for to show that.

* Type of adjustment and examples

A) DEFERRALS ADJUSTMENT
1) Adjusting for Deferred Expenses: Two kinds of asset accounts are involved in the deferral adjusting entries: prepaid expenses and fixed assets. These are assets that are used up over time; these entries show just how much was used upduring this period.

EXAMPLE

First, the prepaid expense account. In this example, your company paid a $1,200 premium in January to your insurance company for the whole year's worth of business coverage. That works out to $100 per month throughout the year ($1,200 divided by 12 months). This is what the adjusting entry looks like:

March 31, 2006
Insurance Expense
To recognize one month ofinsurance expense.
$100.00 | |
| Prepaid Insurance | | $100.00 |
| | | |
The adjusting entry for depreciation looks somewhat similar, but it has one big difference. Instead of posting a credit to the fixed-asset account, you use that contra account for accumulated depreciation instead. In this example, your company has one fixed asset that you bought for $6,000 and depreciate over...