Appropriate adjusting entries turn a company’s books from a simple list of transactions into a far more accurate reflection of how the business is doing. Small business owners sometimes think that as long as someone is recording every sale made and every expense paid, everything is being recorded properly. But some important items don’t get into the books simply by noting daily transactions.
Some adjusting entries need to be made, and small business owners need to be aware of them, and how to calculate them, even if they have a separate person taking care of the books.
Some examples of the adjustments that should be entered into the ledgers at the end of every accounting period are:
- Accrued expenses.These include wages earned but not yet paid. An example of this is when a paycheck is issued for the last half of one month, but given to the employee in the next month. The only way to show this is with an adjusting entry, which is shown as a debit to Wages Expense and a credit to Wages Payable (or Accrued Wages).
- Prepaid expenses. A small business owner could write a check in one month to pay for an expense in the next month. An example of this is with something like an insurance bill. The check for October’s premium is written in September. Without an adjusting entry, the expense may show up in September instead of in October, where it belongs.
- Depreciation Expense. This is a non-cash expense, and will not show up in a company’s books unless it is specifically put there. Generally, an accountant gives these figures so that the business owner can enter them into the books.
These are just a few of the adjusting entries that most companies need to make every month. The specific entries depend on your business. Maine-based small business owners need to be aware of these adjustments before closing the books each month, and should consult with Filler & Associates if they’re not recording them.