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Accounting Study Materials / Define an adjusting entry
An adjusting entry is a non-standard entry an
accountant staffer makes to correct an error, ensure that corporate books are
in line with business legislation or accounting guidelines, or adapt operating
practices to top leadership's stipulations. Under GAAP and IFRS, adjusting
entries cover items as diverse as prepaid expenses, unearned revenues, error
corrections and the cumulative effect of accounting changes. Prepaid expense is
a good example to understand the concept of adjusting entry. A company
typically pays premiums in advance -say, remittances cover 12 months, but
doesn't receive coverage immediately. For example, the business remits $24,000
to an insurance company at the beginning of the year, and this amount covers 12
months. After one month, the prepaid insurance account will show 11 months'
worth of coverage, or $22,000 ($24,000 divided by 12 times 11).
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