What on Earth (or Middle-Earth) is an Adjusting Journal Entry?
By Joe Accountypants - Updated on October 10, 2023
🎡 The Gateway to Financial Clarity 🎉
Imagine your ledger as a theme park, and the Adjusting Journal Entries (AJE) as the ultimate ride that brings everything together perfectly! Adjusting Journal Entries are made at the end of an accounting period to ensure your financial statements portray a true and fair view of your financial position. And hey, who doesn’t like a good story with a fair ending?
📝 Definition Recap:
An Adjusting Journal Entry (AJE) is made in a journal to record a movement, such as a prepayment at year-end, which then has to be posted to a ledger account. Our well-trained fiscal acrobats perform stunts to keep the balance right!
😆 Examples of Adjusting Journal Entries: Year-End Shenanigans
Below are some delightful examples where Adjusting Journal Entries come into the rescue like caped crusaders:
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Prepaid Expenses: If you prepaid your insurance for the next year, but this year you enjoyed only a few months, some expense must be adjusted!
gantt title Prepaid Insurance
section Insurance Timeline Used : 2023-01-01, 10d Remaining :done, after 10d
2. **Unearned Revenue:**
If a client's payment landed in your hands, but the fairy task – the actual work – is incomplete, you'll have to adjust.
```mermaid
gantt
title Unearned Revenue
section Revenue Timeline
Delivered: 2023-04-01, 20d
Remaining :done, after 20d
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Accrued Expenses: Say goodbye to supposing when you get your paper towel stock supplied! Record expenses beforehand.
gantt title Accrued Expenses section Paper Towels Ordered: 2023-11-01, 5d Delivered:done, after 5d
### 🤓 The Formula: How-To Cast the Spell
Recording an adjusting journal entry involves taking into account the following:
* Debit the involved Expense/Revenue account
* Credit the related Asset/Liability account
Example:
**An insurance prepayment of $600 in December, covering the next 6 months.**
```mermaid graph TB
A(Insurance Prepayment: $600) --> |End of December| B((Asset)) --> |Dec Debit $100| C[Expense] -->|Monthly Adjustments|D(Liability)
Quiz Time! 📚 ⏰
Are you ready to test your knowledge and prove your Adjusting Journal Entry prowess? Let the games begin!
What else if not shedding light on the most mysterious part of bookkeeping?
