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The Corporate Finance Institute Accounting
An example of adjusting entries
Consider XYZ Company that took out a loan from a bank on December
1, 2017. The first interest payment is to be made on June 30, 2018 and
the company is preparing its financial statements for the year ending
December 31, 2017. Even though the interest payment is to be made on
June 30 in the following year, to properly report the company’s financial
status, the company must accrue the interest expense for the month
of December and include that value even though the expense was not
actually paid (i.e. an exchange in cash). This is an accounting system
called the accrual basis of accounting.
The accrual basis of accounting states that expenses are matched with
its related revenues and are reported when the expense is incurred, not
when cash changes hand. Therefore, adjusting the entries are required
because of the matching principle in accounting.
Four types of adjusting journal entries
There are four specific types of adjustments:
1. Accrued expenses
2. Accrued revenues
3. Deferred expenses
4. Deferred revenues
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