Significance of adjusting journal entries
Whenever every fiscal period of any firm ends, the accounting department has the noble duty to prepare journal entries adjustments. This constitutes a crucial accounting exercise since any manufacturing firm or any other profit making organization requires a financial cut-off free from errors to be drawn at the end of every financial period as a chief milestone of ensuring accurate and complete accounts. In process of posting balances especially in non-computerized accounting systems, erroneous entries occur perhaps due to transaction entries omissions or failure to honor contra entry accounting concept among other reasons.
In an accounting book called the journal or general ledger, individual T (tee) accounts are prepared for every transaction made, whether encompassing liabilities, assets, expenses or even any other transaction such as drawings and direct deposits, which affect the owner’s equity. To reflect the true balances at the end of every financial year of the business, it crucial for the journal entries to be adjusted accordingly since the balances are utilized in drawing other financial statements such as the trial balance or balance sheet (Adjusting, 2010, Para. 2).
As a way of example, failure to have ledger accounts that portray the true balances would result to a disagreement of balance sheet invoking preparation of other accounts such as the suspense accounts in n attempt to provide an accounting basis for the observed misappropriation. However, there exist four ways of adjusting the journal entries.
Four ways of adjusting entries and manufacturing examples
According to Miegs, Williams, Haka, and Bettner (2003, p. 137), there are four types of journal entry adjustments: accrued revenues, expenses, unearned revenues and deferred expenses. Deferred expenses or alternatively called prepaid expenses entangle expenses paid in cash but prior to their usage are recorded in the respective journal as an asset. In a manufacturing company, perhaps the most obvious example of deferred expenses adjustment is that of utilized portion of insurance premiums.
For example, supposing the purposes of insurance premium payments receive $ 1000. If only a portion of $ 500 is anticipated to be used, then the procedure would be to debit $ 1000 prepaid insurance in an asset account. An adjustment will however, be required when the $ 500 portion is utilized by crediting the asset account by the same amount.
Unearned revenues comprise revenues that are received in form of cash but recorded as part of the liabilities before they are actually earned. For instance, supposing a customer orders for the manufacture of certain goods according to his specifications and as a way of certifying his/her commitment pays some deposit. This deposit is treated as a liability until the goods are delivered to the customer. The procedure would thus be to credit the earned revenue account and debit it immediately the delivery is made.
Accrued expenses or liabilities comprise the already incurred expenses, which have not yet appeared in the recorded or payment and thus treated as part of revenues. An example in a manufacturing establishment would be an expense such as payrolls released at the end of a given payment period but remains ineffective until the end of the next period. The approach is generally to reverse the entries in the respective journal accounts at the end following payment period and create the appropriate journal account.
The term accrued revenues refers to all revenues earned but the customers have not yet paid them or alternatively appropriate journal postings have not yet been made in the general ledger. An example in a manufacturing firm would entail “a custom ordered machine that has been shipped FOB shipping point on the day the accounts receivable module is closed and the approval to bill the customer has not been received by the billing clerk” (Gibson, 2007, p. 67). ). Adjustments are necessary if the revenue needs recognition in the right period immediately after the remittance of an invoice to the customer.
How the entries would be made in a computerized accounting system
Computer based accounting software permits a thorough analysis of the trial balance at the end of every economic year. Such performance entails “performance budget to actual and month to month to ensure all of the accounts are correctly stated” (Gibson, 2007, p.91). The protocol is to identify a journal adjustment entry and then making a preparation of an appropriate input form. Crucial to note is that, the form requires approval by the requisite manufacturing organization’s accounting management head. It should thus be backed by source documents providing information justifying the perceived erroneous entries. On fulfilling these preconditions in either self-reversing format of journal entry or standard format, the journal entries are feed into general ledger computer system.
Two ethical issues resulting from the preparation of the manufacturing entries
The accounting practice in general deserves a tentative compliance with various ethical rules established within an organization. One of the greatest concerns is that, failure to observe the codes of ethics such as honesty in case an accountant discovers to have made an erroneous entry would have enormous repercussions on the ability to portray accountancy integrity and hence reflection of true financial position of the manufacturing firm is amicably hindered.
Another concern is that journal entries adjustments forms one of the crucial mechanisms that organization’s money fraudsters utilize to miss-appropriate organizations cash. One can achieve this for instance by accruing more expenses or revenues as it ought not to be.
References
Adjusting, J. (2010). Adjusting Journal Entries. Web.
Gibson, C. (2007). Financial Reporting Analysis. Mason, OH: Thomson.
Miegs, R., Williams, J., Haka, S., & Bettner, M. (2003). Financial Accounting. New York: McGraw-Hill/Irwin.