An adjusting journal entry is usually made at the end of an accounting period to recognize an income or expense in the period that it is incurred. It is a result of accrual accounting and follows the matching and revenue recognition principles.
Generally, adjusting journal entries are made for accruals and deferrals, as well as estimates. Sometimes, they are also used to correct accounting mistakes or adjust the estimates that were made previously.
Adjusting Journal Entries and Accrual Accounting
In accrual accounting, revenues and the corresponding costs should be reported in the same accounting period according to the matching principle. The revenue recognition principle also determines that revenues and expenses must be recorded in the period when they are actually incurred.
However, in practice, revenues might be earned in one period, and the corresponding costs are expensed in another period. Also, cash might not be paid or earned in the same period as the expenses or incomes are incurred. To deal with the mismatches between cash and transactions, deferred or accrued accounts are created to record the cash payments or actual transactions.
At a later time, adjusting entries are made to record the associated revenue and expense recognition, or cash payment. A set of accrual or deferral journal entries with the corresponding adjusting entry provides a complete picture of the transaction and its cash settlement.
Similar to accrual or deferral entry, an adjusting journal entry also consists of an income statement account, which can be revenue or expense, and a balance sheet account, which can be an asset or liability.
There are also many non-cash items in accrual accounting for which the value cannot be precisely determined by the cash earned or paid, and estimates need to be made. The entries for the estimates are also adjusting entries, i.e., impairment of non-current assets, depreciation expenses, and allowance for doubtful accounts.
Accounting Treatment
- If the amount difference is greater than in the NetSuite account (Debit side more) Credit the difference amount in the Journal.
- If the amount difference is greater than in the NetSuite account (Credit Side more), Debit the difference amount in the journal.
- If the Credit side of the NetSuite account is lesser, credit the amount differences in the journal.
- If the Debit side of the NetSuite account is lesser, debit the amount differences in the journal.