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A Bookkeeper’s Guide: Adjusting Journal Entries

Adjusting journal entries is a pretty common procedure, especially after dealing with a bank reconciliation. It can be a little intimidating, as it involves making changes to documents with an already overwhelming amount of financial information.

That’s why we’ll try to walk you through what an adjusting entry is, and why you may need to make one!

Adjusting journal entries is the process of changing or editing information you’ve already inputted into your general ledger. There are many reasons you might need to do this – but making sure you have accurate data matching the financial activity of your business is a pretty big one.

As a business, you have to record all of your financial transactions occurring on a day-to-day basis. This is the job of a bookkeeper. They do this to help you keep track of where money is coming into your business and where money is going!

This information allows accountants to use the data to create financial statements. These statements help the owners of your business understand its performance. Using this information, well-informed business decisions can be made on the basis of maintaining the healthy growth of your business.

In some instances, you may find that the information entered into the general ledger is incorrect. This could be a consequence of completing a bank reconciliation – a comparison between your bookkeeper’s records and a financial statement.

By doing a bank reconciliation, you could find that certain expenses listed in your bank statement weren’t entered into your bookkeeper’s records, or the exact amount is incorrect. This data needs to be corrected as otherwise you won’t get an accurate picture of the financial position of your business.

So, if you find that your general ledger may have incorrect information, you will need to adjust your journal entries.

How do you adjust a journal entry?

Well, the process of adjusting journal entries usually proceeds at the end of a financial period. At this point, an accountant will go through all the payments made from your accounts, both prepaid and accrued (obligation to pay) expenses as well as accounts receivable and incoming revenue. Using this information, one can identify where it is necessary for an entry to be adjusted – if, for example, an accrued expense is paid after the period in which it is entered into the journal.

This can be a real nightmare, especially if you’re trying to do it yourself. General ledgers and bookkeeper’s records tend to contain a lot of financial information. If you imagine tracking every financial transaction made per day and recording that information into a spreadsheet, it’s going to look pretty chaotic if you don’t know what you’re looking for! If you decide to try it yourself – rather than using a professional bookkeeper like ours – you’ll need a keen eye for detail.

Once you’ve identified which journal entry needs adjusting, you need to make a new entry adjusting the previous, incorrect one. It’s important you don’t adjust the original entry as this would not be an accurate reflection of the bookkeeper’s records. Instead, acknowledging the initial mistake and entering a new entry correcting the previous one is the way to go. In doing so, you make sure that your bookkeeper’s records are up-to-date and accurate.

Ideally, journal entry adjustments should be made however often you publish your financial statements – although this tends to be a monthly occurrence.

Why might you need to adjust a journal entry?

Adjusting entries is especially important if you’re using an accrual accounting system, as cash doesn’t change hands exactly at the recording of the transaction. Adjusting an entry like this shows exactly when the money has been transferred and allows your books to accurately reflect your financial behaviour.

Accrued revenues and accrued expenses are two of five potential reasons for adjusting your journal entries. The three others are depreciation, prepaid expenses and unearned revenues.

Accrued revenue and accrued expense are a little simpler than the other three. They refer to incoming or outgoing payments that have not been processed – once they are processed, the entry is adjusted.

Depreciation, on the other hand, is a little complex. It refers to the process of determining the costs of an asset, like a company car or building. For each month, an adjusting entry would be made to show the fall in value of the asset.

Prepaid expenses refer to assets like office supplies, ones that are paid for up-front and as such used by the business. The value of these assets depletes as they are used until they eventually become an expense.

Unearned revenues are somewhat similar to accrued revenues – they refer to payments for goods or services not yet fulfilled. When the purchase is made, an adjusting entry debiting unearned revenue and crediting revenue would be made.

As we’ve mentioned, doing any one of these can be a little complicated but using a cloud accounting software can help make finding the entries that need to be adjusted, and making them, a little easier. Or, alternatively, you could hire a professional bookkeeper, like one of ours at Count, trained to make journal adjustments!

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