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ADJUSTING ENTRY | FREE NOTES ON AFB SYLLABUS | AFB STUDY MATERIAL 2022

FREE NOTES ON ADJUSTING ENTRY FROM AFB SYLLABUS 2022 | AFB STUDY MATERIAL 2022

Notes for the JAIIB Candidates preparing for JAIIB Exam 2022 as per prescribed Syllabus 2022 by IIBF on ‘Adjusting Entry’.

This article is important for the candidates who are preparing for June JAIIB Exam 2022. As only a little time has left for the JAIIB papers, candidates should have started with their revisions of the concepts or topics of accounting and Finance for bankers 2022.

In this article, we will explain the meaning of adjusting entries, why they are required to be passed and what could be the types of adjusting entries from the JAIIB study material 2022.

What do you mean by an adjusting entry?

These are the entries passed to change the already recorded journal entries. These adjusting entries are passed with the purpose to make sure that the recorded amounts are correct for the accounting periods.

Entries are basically the track records of money i.e how the money moves. It means how the money has entered into the business, left and mood between different accounts.

Below is an example of adjusting entry

A company prepares an invoice for its customers for the services it has performed for Rs.20,000.00 dt. 09.09.2021 but the Customer actually pays the bill on 10.10.2021.

These two transactions will be recorded as:

  • In September: The money will be represented as an accounts receivable i.e income yet to receive.
  • In October: As the company will receive the money, an entry to record the cash deposit in bank account will be passed.

Now, an adjusting entry doesn’t mean that you have to go back in the period & change the already passed entry, instead you pass an entry to amend the previously recorded entry for any changes or amendments.

For example

Suppose in the above example, the customer calls the company about the Bill asking for a cash discount. In case the company grants the discount, an adjustment entry will be required to be passed for adjustment of discount. The effect will be that accounts receivable and revenue will be reduced by the 5% of the invoice amount i.e Rs. 1000.00

Adjusting entries in another way to follow up with the accounting principles. Such as in the above example, then a project will be passed to adjust the accounts receivable and the income are one way to apply the matching concept of accountancy. As per this concept, expenses are required to be recorded in the same accounting period in which their related revenue are recorded.

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When are the adjusting entries passed?

The adjusting entries are passed before the preparation of trial balance and financial statements.

Why is there a requirement or need to make adjustment entries?

Adjustment entries make sure that all the activities of the businesses are recorded with accurate figures at accurate time. 

If these entries are not made, the books of accounts will show payments for expenses which do not belong to the current financial year or accounting period or collection of revenue which is yet to be earned.

This would lead to mis-matching of income and expenses and the owners or stakeholders will not be able to correctly figure out the revenue. This will ultimately lead to inaccurate financial statements which won’t let the concerned persons to take informed decisions.

Who makes these adjusting entries?

Businesses whose accounting books are prepared on the basis of an accrual system of accounting, are required to make adjusting entries while businesses who follow a cash basis system, might not actually need to make adjusting entries.

Are there any types of adjusting entries?

As per the AFB Syllabus 2022, there are 5 types of adjusting entries and they are clearly different from one another. These types are explained in the below points:

Accrued revenues:

When revenue is generated for one accounting period, but not recognised until it is invoice and received. In that case, accountants have to make an entry for accrued revenue.

For Example:

A business house makes safety-pins. It is in the month of November that it makes Rs.12000.00 & invoice the same in the month of December.

The business is incurring expenses (cost) for making safety pins in the month of November while the income, because it will be invoiced in December, reflected in later month. So, to reflect the accurate income for the month, the business will also need to show the revenue generated for the expenses made in November – in the month of November itself.

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The Adjustment entry for the above example will be:

In the month of November:

When the business makes the safety pins, it will record the cost as well as the invoice amount (i.e anticipated income).

DATE PARTICULARS DR. AMOUNT CR. AMOUNT
November Accrued receivables A/c

To Revenue A/c

Dr. 12000.00 12000.00
When the amount will be received in the month of December (after invoice has been generated), the amount standing in the accrued receivable account will move to Cash A/c.
December Cash A/c

To Accrued receivables A/c 

Dr. 12000.00 12000.00

 

Accrued expenses:

Just like accrued income, accrued expenses are the expenses which relates to want accounting period but the get paid in the later period.

For Example: 

The business house making safety-pins has monthly rent of Rs. 5000.00 December due but due to some reasons, the rent will be paid in January, next year as the invoice for December will be raised in January. 

The business will have to pass an adjustment entry recording the money that will be required to pay as rent as an accrued expense by debiting the rent account.

The Adjustment entry for the above example will be:

In the month of December:

Record the expense for the period it relates to.

DATE PARTICULARS DR. AMOUNT CR. AMOUNT
December Rent A/c

To Accrued Expense A/c

Dr. 5000.00 5000.00
When the amount will be paid in the month of January (after invoice has been received), the amount standing in the accrued expense account will actually get paid.
December Accrued Expense A/c

To Cash A/c 

Dr. 5000.00 5000.00

 

Deferred revenues

Deferred revenues are the revenues, which are received in advance while the services against which they have been received – are yet to be delivered. In other words, businesses are paid now while the services will be delivered in the later period. 

But even though a business receives the payment right now, it has to make sure that everyone has received it in the month in which the related services are actually delivered.

For Example:

Because of the well-known credibility of the business house, it receives an advance Rs. 25000.00 payment for the safety pins, which will be delivered after 2 months.

Example of adjusting entry:

In the month of December:

First, the income on the books deferred revenue will be recorded. Business House will credit it to the deferred revenue A/c for now.

DATE PARTICULARS DR. AMOUNT CR. AMOUNT
January Cash A/c

To Deferred Revenue A/c

Dr. 25000.00 25000.00
When the services will actually get the award in the month of march (after 2 months of receipt of revenue), the amount standing in the deferred revenue will get credited to revenue account.
March Deferred Revenue A/c

To Revenue A/c 

Dr. 25000.00 25000.00

 

Prepaid expenses:

These are the expenses which have been paid in advance while the invoice has not actually been received. In other words, the payment expense will be paid now while the services will be received afterwards (say 1 month later).

For Example:

The Business pays salary of some of its employees in advance (1 month) Rs. 40000.00 in January itself. While the amount has been paid now, the salary belongs to the later period & business house will need to make an adjustment entry.

Example of adjusting entry:

In the month of January:

First, the business house will record the salary which has been paid in advance for the month in which it has been paid.

DATE PARTICULARS DR. AMOUNT CR. AMOUNT
January Salary Paid in Advance A/c

To Cash A/c

Dr. 40000.00 40000.00
Next month, when the salary will actually be due to be paid, the salary paid in advance will get adjusted with that month’s expense for the concerned workers or employees.
February Salary A/c

To Salary Paid in Advance A/c 

Dr. 40000.00 40000.00

 

Depreciation expenses:

When asset (such as machineries, furniture & electronic devices etc. is depreciated for which a single payment has been made to purchase it – but the distribution of depreciation is expensive over multiple periods.

When the accounting period ends during which an asset is depreciated, the value of the Asset on the balance sheet changes every time, expense of depreciation is charged in the profit and loss statement.

So, this was all about the adjustment entries which are required to be made on behalf of accrued revenues, accrued expenses, deferred income, depreciation & prepaid expenses after the given syllabus of accounting and Finance for bankers 2022 from JAIIB Exam 2022.

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