What are adjusting journal entries and why do we prepare them?
Adjusting entries are internal transactions that bring certain ledger account balances up to date. Since we record for a month at a time before posting to the ledger, some accounts need to be “adjusted” before preparing financial statements. The adjusting process looks at all balance sheet accounts and states them as accurately as possible, and this process automatically adjusts certain income statement accounts as well. Examples: decreasing the balance of the supplies account and increasing the supplies expense account for the cost of supplies consumed during the month, and increasing the salaries payable account and the salary expense account for salaries earned by employees but not paid to them yet. Remember that all adjusting entries will affect at least one balance sheet account and one income statement account. Adjusting entries apply accrual basis accounting to transactions that span more than one accounting period. For example: supplies consumed one month will be reported as an
