In financial accounting, accountant’s work is divided into different parts. Pass the journal entries; post to ledger and make trial balance is normal part of duty. But, when the accounting period closes, accountant has to search some transactions which have not been recorded in the books. All these transactions are adjusted through journal entries. Its affect will be only profit and loss account and balance sheet. There will not any affect on the trial balance. Many of these transactions are existed due to applying of accrual accounting method. Outstanding and advance expenses and incomes need to adjust from actual amount of expenses and incomes.
Following are its steps:
1st Step : Make the List of Transactions which need Adjustments
Accountant has to research for making adjustment entries. Suppose, Salary of 10 employees has not been paid till end of the period, this will be the outstanding salary. But, there may be other expenses which may be payable. All these expenses will go to the outstanding expenses category. Like this, we have to make the list incomes which earned but not received. Suppose, company declares divided but you did not receive. You have to take the rent from your tenant. For this, you have to check your time table and time when you close your financial year. Every expense or income may be some money which may be payable and receivable in the end of period. Except this, we also check which are advance payments of expense and which are advance receipt of income in the end of period. All these should be adjusted through adjustment entries.
2nd Step : Adjustment Entry of Outstanding Expenses
With adjustment entry, accountant increases the total amount of a particular expense. Total current liability will also increase. In this adjustment entry, expenses will be debited and outstanding expenses will be credited.
3rd Step : Adjustment Entry of Advance Expenses
With this adjustment entry, current asset will increase and our expense will decrease because we have paid money but still we did not get any service. In this adjustment entry, advance expense will be debited and expense account will be credited.
4th Step : Adjustment Entry of Oustanding Incomes
With this adjustment entry, our incomes will be increased. We add outstanding income in the particular income. Our current asset will also be increased. In this adjustment entry, outstanding income account will be debited and income account will be credited.