Example: Prepaid expenses (like insurance or rent) initially recorded as assets.
Adjustment: As the asset is used, its cost is transferred to an expense account.
Purpose: Reflect the portion of the asset consumed during the period, matching it to the period's revenue.
Example: Unearned revenues like customer deposits or advance payments.
Adjustment: Once services are provided, unearned revenue is recognized as earned revenue.
Purpose: Reflect revenue that has been earned during the period.
Example: Accrued expenses such as salaries or interest that have been incurred but not yet paid.
Adjustment: Recognize these expenses by debiting the appropriate expense account and crediting a liability.
Purpose: Ensure expenses are recorded in the period in which they are incurred.
Example: Revenue earned but not yet billed, like interest or services provided.
Adjustment: Record the revenue by debiting an asset (Accounts Receivable) and crediting a revenue account.
Purpose: Ensure revenues are recognized when earned, regardless of when the cash is received.
Adjusting entries address timing differences between when cash flows occur and when revenues or expenses are recognized.
They ensure accurate matching of revenues and expenses in the correct accounting period.