During the year, it collected retainer fees totaling $48,000 from clients. Retainer fees are money lawyers collect in advance of adjusting entries examples starting work on a case. When the company collects this money from its clients, it will debit cash and credit unearned fees.

The following are the updated ledger balances after posting the adjusting entry. Income Tax Expense increases (debit) and Income Tax Payable increases (credit) for $9,000. Taxes are only paid at certain times during the year, not necessarily every month. Taxes the company owes during a period that are unpaid require adjustment at the end of a period. Interest Expense increases (debit) and Interest Payable increases (credit) for $300.

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Reporting options are limited to financial statements and a couple of list reports, with few customization options available, though reports can be exported to Microsoft Excel if customization is desired. In this journal entry, cash is increased (debited) and accounts receivable credited (decreased). Debits and credits are the true backbone of accounting, as any transaction recorded in a ledger, whether it’s hand-written or in your accounting software, needs to have a debit entry and a credit entry. Interest expense arises from notes payable and other loan agreements.

If the entries aren’t booked, it’s easy to forget about obligations and get a skewed picture of your financial position. For example, if you have an annual loan interest payment due in February and no liability is reflected on the books in January, you’re going to overestimate your available cash. Likewise, if you make an annual business insurance payment and it’s not adjusted, you may believe your overall cost of doing business has increased when it hasn’t.

Post to the general ledger

The primary distinction between cash and accrual accounting is in the timing of when expenses and revenues are recognized. With cash accounting, this occurs only when money is received for goods or services. Accrual accounting instead allows for a lag between payment and product (e.g., with purchases made on credit). Adjusting journal entries are used to reconcile transactions that have not yet closed, but which straddle accounting periods.

Accumulated Depreciation will reduce the asset account for depreciation incurred up to that point. The difference between the asset’s value (cost) and accumulated depreciation is called the book value of the asset. When depreciation is recorded in an adjusting entry, Accumulated Depreciation is credited and Depreciation Expense is debited. To illustrate, assume that on December 1, a company recorded its $2,400 payment for six months of property insurance for December through May. At December 31, one month of the insurance cost (1/6 of $2,400) has expired and should be reported on its December income statement as Insurance Expense of $400.

Introduction to Adjusting Journal Entries

However, the company still needs to accrue interest expenses for the months of December, January, and February. For the sake of balancing the books, you record that money coming out of revenue. Then, when you get paid in March, you move the money from accrued receivables to cash. When you generate revenue in one accounting period, but don’t recognize it until a later period, you need to make an accrued revenue adjustment. If you do your own accounting and you use the cash basis system, you likely won’t need to make adjusting entries.