About Adjusting EntriesFor Month End and Year EndIn this article, I will chat about the types of adjusting entries your professional bookkeeper or accountant would likely book as they work on your accounting records ... including accruals and deferrals.
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My main goal today is to keep this very simple for you. I am going to attempt to give you a more in depth understanding of the numbers in your general ledger and behind your financial statements. Your main goal is to understand what types of adjusting entries are best left to your accountant ... but as with most things, you are the best judge of your bookkeeping capabilities. Parts of this article explaining the different kinds of adjusting entries are available only to my newsletter subscribers. To view this article in its entirety, you will need an Insider's Pass. Please subscribe to The Bookkeeper's Notes newsletter to receive your free pass. Accruals and deferrals are regularly booked as part of doing year-end. So what exactly are they? Sometimes, the paperwork has not come through for expenses or revenues that have happened before your year end ... so it is necessary to book an accrual. An accrual is for expenses that have been incurred but not reflected in your records yet ... or for revenues you've earned but not booked yet. Two good examples of accruals would be interest. Interest expense on a bank loan may have to be accrued or interest income may need to be accrued for a term deposit. Sometimes, accounting events / transactions have occured during the accounting period that affect more than one accounting period ... so it is necessary to book a deferral. A deferral is where a portion of the income or expense relating to a transaction has to be allocated in a future accounting period. Two good examples of deferrals would be prepaid expenses or unearned revenue from customer deposits. While accruals and deferrals can be booked during month end, most small businesses don't need to concern themselves with them until year end ... particularly if your financial statements are prepared for internal use only. Where do accruals and deferrals show up on your financial statements? Accruals and deferrals affect both the income statement and the balance sheet. The portion of the accrual or deferral entries on the income statement side of the transaction are booked to the account the entry is affecting, however that is not normally so for the balance sheet part of the entry. Most (not all) month end or year end accruals on the balance sheet will be found in one of two accounts ... accrued liabilities (a current liability account) or accrued receivables (a current asset account). Good luck with your bookkeeping! ... and congratulations on taking the time to understand the numbers behind your financial statements.
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