An adjusting entry is a transaction that affects the previous accounting period’s results. It does not affect the current account balances, but it does change what will be reported for this period. This blog post goes over when you should make an adjusting entry and how to know when it’s necessary.
There are three types of adjustments: corrections (useful if there was a mistake made in recording transactions), seasonal purchases (items purchased every year at the same time) and accruals (accounts receivable or payable). The first two need only one adjustment per year while accounts receivable/payable may require additional entries quarterly depending on your organization’s practices.
Accounts with long-term liabilities such as mortgages usually have yearly entries instead of quarterly entries. The following are examples of adjusting entries that you may see on an income statement: Notations for a correction to the previous accounting period’s records, such as correcting errors in recording transactions or misclassification of expenses and revenues Seasonal purchases these would be items purchased every year at the same time (e.g., holiday decorations).
Accruals when accounts receivable/payable is recorded before customers have paid their bills completely (usually done once per quarter). Accounts with long-term liabilities such as mortgages usually have yearly entries instead of quarterly entries Dividends declared but not yet received by shareholders which will be credited against later earnings, this type of entry occurs infrequently.