An
adjusting entry is a non-standard entry an accountant staffer makes to
correct an error, ensure that corporate books are in line with business
legislation or accounting guidelines, or adapt operating practices to
top leadership's stipulations. Under GAAP and IFRS, adjusting entries
cover items as diverse as prepaid expenses, unearned revenues, error
corrections and the cumulative effect of accounting changes. Prepaid
expense is a good example to understand the concept of adjusting entry.
A
company typically pays premiums in advance -say, remittances cover 12
months, but doesn't receive coverage immediately. For example, the
business remits $24,000 to an insurance company at the beginning of the
year, and this amount covers 12 months. After one month, the prepaid
insurance account will show 11 months' worth of coverage, or $22,000
($24,000 divided by 12 times 11).
