Demystifying Adjusting Journal Entries in QuickBooks
Adjusting Journal Entries don’t have to be confusing.
However, they almost always are confusing. They are just “something the accountant does” and the on-site bookkeeper has little interaction with the process and thus little opportunity to learn about them. So we will provide an overview.
At the most fundamental level, an adjustment is simply making a journal entry to a General Ledger account so that the account better reflects whatever that account tracks. So if we are adjusting the account “Wages Expense” then the goal is to adjust the account so the user of the Financial Statements has a clearer, more reliable understanding of, you guessed it, “Wages Expense.”
As an example, (ignoring taxes, etc. so we can make our point) let’s assume that we are preparing our quarterly Financial Statements for 1/1/19 through 3/31/19. We pay employees every other Friday for the two weeks immediately before that day including that day. Just ignore that this would be tough to do in real life. Assume we last paid payroll on the 22nd which means there is exactly one week (1/2 of the period) that is owed to employees (on the 29th which is the last working day of the month) but not accounted for because payroll has not been run. In short, our payroll records and GL accounts reflect all payrolls except for ½ of the last payroll in the quarter.
Let’s say our payroll is $10,000. If we run our statements with no adjustments then they would not include the expense of $5,000 (which would incorrectly inflate Net Income) and also our liability of Wages Payable or our asset of Cash would not be correct.
So how do we fix this? We simply adjust the accounts. In our example we would increase (debit) Wages Expense for $5,000 and either increase (credit) Wages Payable or decrease (credit) Cash.
There are a few topics associated with Adjusting Entries such as Reversing Entries (sometimes the adjustments are reversed). But we will save those for another time.
Adjusting Entries are used at the end of the period. Traditionally, a Trial Balance was made, then the adjustments entered, and then the Adjusted Trial Balance was prepared as the basis for the Financial Statements.
Although a little beyond this post; know that adjustments are usually made for depreciation/amortization, accruals, and deferrals.
This should provide you a sense of what Adjusting Journal Entries are. As always, if you have any questions, give us a call.