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Adjusting Entry: A Comprehensive Guide to Its Legal Definition
Definition & Meaning
An adjusting entry is a bookkeeping entry made at the end of an accounting period. Its purpose is to allocate and record previously unrecognized revenues and expenses, ensuring that financial statements accurately reflect a company's financial position. Adjusting entries are crucial for adhering to the revenue recognition principle, which states that revenue should be recognized when earned, not necessarily when cash is received. These entries also address changes in assets and liabilities for the period in which they actually occurred. Sometimes, adjusting entries are referred to as "balance day adjustments."
Table of content
Legal Use & context
Adjusting entries are primarily used in accounting and finance, which are integral to various legal practices, including corporate law, tax law, and financial compliance. They ensure that financial records are accurate and comply with legal standards, which can be critical during audits or legal disputes. Users can manage their adjusting entries using templates from US Legal Forms, which can help streamline the process and ensure compliance with relevant regulations.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1: A company provides services in December but does not receive payment until January. An adjusting entry is made in December to recognize the revenue earned.
Example 2: A business pays its insurance premium for a year in advance. Each month, an adjusting entry is made to recognize one month's worth of the premium as an expense. (hypothetical example)
Comparison with related terms
Term
Definition
Key Differences
Accrual
Recognition of revenue or expenses before cash is exchanged.
Accruals are a type of adjusting entry focusing on unrecorded transactions.
Deferral
Postponement of revenue or expense recognition to a future date.
Deferrals are also a type of adjusting entry but deal with recorded transactions needing adjustment.
Common misunderstandings
What to do if this term applies to you
If you need to make adjusting entries, start by reviewing your financial records for any unrecognized revenues or expenses. Utilize templates from US Legal Forms to help you create accurate entries. If the process seems complex or if you're unsure about the implications, consider seeking guidance from a professional accountant or legal expert.
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Impact: Affects financial statements and tax filings.
Importance: Ensures compliance with accounting principles.
Key takeaways
Frequently asked questions
The purpose is to ensure that revenues and expenses are recorded in the correct accounting period, providing a true picture of a company's financial status.
Adjusting entries should be made at the end of an accounting period, typically before financial statements are finalized.
Yes, with the right tools and templates, you can manage adjusting entries yourself. However, complex situations may require professional assistance.