May 01, 2018

Adjusting Journal Entries: Why is Adjusting Entries Necessary?

Adjusting journal entries are accounting entries made to a company’s journal of accounts at the end of a financial period. The process allocates income and expenses to the actual period in which the income or expense occurred.

This is done under revenue recognition principles in accrual basis accounting, as opposed to the time payment was received or made under cash basis accounting.

Adjusting journal entries are used to allocate:

  • Prepayment of an expense to the period in which the expense is incurred
  • Unearned revenue from a received prepayment to the period in which it is earned
  • Accrued expenses that are paid later to the period in which the expense is incurred
  • Accrued revenue that has been earned but is received later to the period in which it is earned

Adjusting entries are also used to correct errors, and must be completed before a company’s financial statements can be issued. Here are some common scenarios:

  • No entries have been made in the company’s accounting records for certain expenses or revenues, but those expenses and/or revenues occurred in the period and must be included in the period’s income statement and balance sheet
  • An entry has been made in the company’s accounting records, but the amount needs to be moved to the period in which the expense is incurred or the revenue is earned or divided up between two or more accounting periods
  • Something is booked to a capital account like Fixed Assets that, under company policy, should be booked to an expense account like Supplies Expense, or vice versa

What Is the Process for Adjusting Journal Entries?

At the end of each financial period, accountants go through all of the prepaid and accrued expenses as well as unearned and accrued revenue and identify necessary adjusting entries.

This is often a time-consuming process that involves spreadsheets to track expenses, and payments made against those expenses, as well as revenue earned and payments received against that revenue.

These adjustments are also often a result of the account reconciliation process during the financial close, or may be detected by doing variance analysis of account balances to detect any unusual balance fluctuations.

When the need for an adjusting journal entry is identified, accountants prepare the journal entry to credit and debit appropriate accounts. These journal entries should include supporting documentation, links to applicable policies and procedures, and be properly reviewed and approved before being posted.

What Solutions Does BlackLine Offer?

BlackLine Journal Entry automates the process for creating and managing adjusting journal entries. It provides an integrated system for the creation, review, approval, and posting of adjusting journal entries. Journal entry templates ensure standardization across the organization, and validation rules check entries for errors before posting.

Advanced features include the automatic creation of journal entries through cloning of recurring journal entries or import of journal and journal lines from report writers or spreadsheets. It also provides integrated storage of supporting documentation, links to policies and procedures, and automatic posting and status tracking for real-time updates.

BlackLine Account Reconciliations integrates with Journal Entry to automate and streamline the account reconciliation process. This gives accounting teams more time to analyze and book any necessary adjusting journal entries.

This solution also simplifies the process of handling prepaid amounts. It includes an amortizable prepaid template that records the original amount, open date, and the dates amortization should begin and end.

Amortized amounts are automatically calculated based on this information. The amounts can also be manually updated if there is a change to the balance or if an item should not be amortized on a straight-line basis.

A built-in control displays when the amounts entered do not equal the total amount being amortized. This template provides an easy way for accountants to handle prepaids, eliminating the need to manually set up and manage spreadsheets.

Account Reconciliations also integrates with Transaction Matching to provide automated analysis of transaction details. The integration of these products with Journal Entry centralizes all information concerning a given journal in one easily accessible place with comments, documents, and links to underlying matching transactions and reconciling items.

In addition, BlackLine Variance Analysis monitors fluctuations in account balances and helps identify errors that require adjusting journal entries.

Learn more about how your F&A organization can make the move to modern accounting by centralizing, managing, and automating journal entries. 

Michael Shultz
Director of Finance Transformation

Modern Accounting