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Free «Manufacturing Entry’s» Essay Sample

Introduction

Accounting and book keeping is based upon the double entry concept. It simply states that for each transaction conducted, the total debits are equal to total credits.

Adjusting entries in an accounting system refer to the entries made at the end of an accounting period to update the current account balances contained in the accounting reports in order to represent the most accurate balances.

Adjusting entries result due to goods purchased or supplied on credit and delay in payment or receipt. Henceforth, goods purchased on credit in the previous accounting period can be paid for in the current accounting period. An adjusting entry then is done to post transaction and money received or paid into the correct accounting period in which the transaction took place. On the other hand, current account balances only represent what happened on daily basis. It captures mainly cash received and paid out in the current period.  It does not consider the timing of the items being paid for or items of monies received for but include transactions paid in cash basis without considering whet ether the expenses were incurred in the present or previous period.

Therefore, analyzing balances and information posted and ensuring they are posted to correct accounts and correct accounting periods is what is called adjusting entries in an accounting system.

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Discussion

In any given accounting system there exists four types of basic adjusting entries.

These entries include prepaid expenses, accrued expenses, assets recorded as expenses and vice versa as well as liabilities posted as revenues and vice versa. The adjusting entries can be elaborated as follows;

  • Accrued Expenses

These are expenses incurred but not yet paid for. They most probably will be paid for in the next accounting period but because they were incurred in the present period and not reflected in the current balance account, it is necessary to do an adjusting entry so that the profit of the current period may not be overstated. The following journal is made for electricity bill incurred of Ksh. X and not paid for in the current period.

Date               Detail                                     Debit                          Credit

                        Electricity bill expense  X

                                   Electricity bill Expense payable                        X

  • Prepaid expenses:

These are expenses paid for in advance for the next period but are currently recorded as expense incurred in the present period. An entry is passed to reduce the present period expenses and increase the next period’s expenses by the amount recorded as advance expense. For example, if a business pays for electricity in advance for an amount of Ksh. X. The current’s period electricity bill expense will be reduced by Ksh. X and the next’s period increased by Ksh. X. The following journal will be made.

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Date               Detail                                     Debit                          Credit

                        Electricity bill expense  X

                            Prepaid Electricity bill Expense                                X

 

  • Accrued revenue;

These refer to revenue earned but not yet received. Goods sold on credit to trust customers of the organization mainly fall into this category. In a manufacturing company shipping of goods may cause delay in payments because customers pay for goods after they receive them and are usually invoiced by the firm.  As result, income for various transactions may be delayed and posted to the next period. Therefore, an adjusting entry is necessary. The amount is posted in the profit and loss as a credit so that to increase profit to its accurate state and to avoid understating the profit. For instance, Good sold on credit to Patel of amount Ksh. X will be posted as follows;

Date               Detail                                     Debit                          Credit

                        Accrued Revenue                                X

 
 
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                                    Revenue                                                             X

  • Revenues Not yet Earned;

These refer to income received but the good or services are not delivered to the customers. For example a customer may decide to pay for the goods upfront before they are shipped to him/her.  Delay in delivery may happen and the goods are delivered the next accounting period.  An adjusting entry is made to post the amount to the actual period the goods were received by the customer. The following entry is made;

Date               Detail                                     Debit                          Credit

                        Revenue                                  X

                           Revenue Receivable                                                    X

Fixed assets purchased by the firm but recorded as expenses in the current balance manly because cash was paid out.  These items are capital in nature and need to be posted into the balance sheet since they will be used to generate income for the organization. Hence, they are excluded from expenses of the current period and instead posted to the balance sheet on the fixed asset side. Where areas, an entry is made to charge depreciation expense to the profit and loss statement so as not to overstate the profit in a specific period for assets owned by the company.

Computerized Accounting System

At the end of an accounting period, the trial balance is prepared and each item in the trial balance is investigated to ensure it is correctly and accurately entered. Upon realization of the need for an adjustment, in the computerized system the following steps are taken; an input form for a journal entry is prepared. The form then must be evidenced and approved by authorized persons in management accounting. After approval, then a journal is entered in to the general ledger as a reversal or standard journal entry.  

Ethical Issues

Firstly, adjusting entries avoids overstatement and understatement of a firm actual profit. However, there are cases management has abused the tool and used it to give a wrong impression of the actual performance of an organization.

Secondly, justification of each adjustment is must be done adequately to prove the viability of each adjustment posted or done.

Conclusion

In conclusion, adjusting entries in accounting system is important because after adjustment, it gives the proper correct and accurate view of an organizations financial status and performance.

   

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