Adjusting Entries

Journal entries are used to record financial transactions that occur during the accounting period. However, there are some transactions that do not occur on a daily basis, and therefore, they need to be adjusted at the end of the accounting period. These entries are called adjusting entries.

Outstanding Expenses

Outstanding expenses are those expenses that have been incurred but not yet paid. For example, if a company has received a utility bill for the month of December but has not yet paid it, this expense is considered outstanding.

Prepaid Expenses

Prepaid expenses are those expenses that have been paid in advance but have not yet been used or consumed. For example, if a company has paid rent for the next three months, this expense is considered prepaid.

Depreciation

Depreciation is the process of allocating the cost of a long-term asset over its useful life. For example, if a company purchases a machine for $10,000 that has a useful life of 5 years, the company would record $2,000 in depreciation expense each year for the next 5 years.

Adjusting Entries for Outstanding Expenses, Prepaid Expenses, and Depreciation

Adjusting entries are made at the end of the accounting period to ensure that the financial statements accurately reflect the company's financial position. The following adjusting entries are made for outstanding expenses, prepaid expenses, and depreciation:

1. Outstanding Expenses

Dr. Expense Account
Cr. Outstanding Expense Account

2. Prepaid Expenses

Dr. Prepaid Expense Account
Cr. Expense Account

3. Depreciation

Dr. Depreciation Expense Account
Cr. Accumulated Depreciation Account

These adjusting entries ensure that the financial statements accurately reflect the company's outstanding expenses, prepaid expenses, and depreciation for the accounting period.