Day 127 Balance day adjustments and closing entry

Balance day adjustments and closing entry

In accrued base accounting, we recognize the revenue and expense only when they incurred. Therefore, at the end of the recording period, we should perform a balance day adjustment in order to maintain the accuracy of the accounting report.

There are six major types of balance day adjustments. For example, the prepaid expense, unearned revenue, expense payable, accrued revenue, depreciation, and bad or doubtful debts are the adjusting entry we need to record. The prepaid expense is the amount paid in advance such as rent or insurance. In fact, we should not record them as expenses at the start of each period, since they have not occurred yet. Hence we debit the prepaid expense and credit the bank account first, and on the day we are doing the adjustment entry, we must debit the expense and credit the prepaid account. It can be treated as a subtraction from the provision account. In addition, the unearned revenue is the revenue we received in advance. We should always refer it as a liability because the service has not yet been provided by us. Similarly, we subtract the revenue when it incurred, which is debit the unearned revenue and credit the revenue. Furthermore, the accrued expense or expense payable is the deferred payment of our expenses. This situation appears commonly when the salary payment date is differed from the recording day. Thereby we have to recognize any accrued wages by debiting wages expense and credit wages payable. Moreover, the requirement to adjust the accrued revenue is normally due to the recording error. Thus we may simply correct the entry.

The last two BDAs are a bit more complicated. The bad debt is inevitable for every business make sales on credit. So the company will set up an allowance for the impairment account which records the estimated bad debt for the accounting period. The company will debit the bad/doubtful debt expense and credit this account. After the bad debt is confirmed, we write off from this allowance account and credit the accounts receivable. One of the biggest advantages for adopting allowance method is the business will be aware for this potential loss and make relevant decisions in regard to it. At last, the depreciation is the accounting measurement of wear and tear on the non-current assets. Consequently, accountants need to reduce the depreciated amount at the end of recording period. The detailed process shoudle be: debit the depreciation expense and credit the accumulated depreciation account.

The BDA is the fundamental element of accrued based accounting, so we must profoundly comprehend this method.