Adjusting entries are the entries made at the and of an accounting period to ensure that the revenue recognition and matching principle are followed. Hence there are two types if adjusting entries: Deferrals and Accruals.
Work Step by Step
The can be explained as below: - A) Deferrals: 1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed. 2. Unearned revenues: Cash received and recorded as liabilities before revenue is earned. B) Accruals: 1. Accrued revenues: Revenues earned but not yet received in cash or recorded. 2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded.