In any organisation/company all business operation transactions are done and regulated via documents. For eg:- Invoice for sale and purchase, Debit note/Credit note for purchase return/Sale return etc. Payment or receipt is done on the basis of the unique Vendor/Customer wise document. For eg:- Receipt on the basis of Sale invoice given to customer and payment on the basis of Vendor invoice. In ERP there are modules to record these transactions. For eg:- Sale module for recording sale transaction and Purchase module for recording purchase transaction. Since booking of transactions are done in ERP, therefore respective payment/receipt also need to be recorded for complete visibility and transparency. Therefore, while doing a payment/receipt entry in ERP for any Vendor or Customer there is an option to adjust/link parent document based on which payment/receipt is done.

Purpose of Adjusting Entries

Adjusting entries, or adjusting journal entries (AJE), are made to update the accounts and bring them to their correct balances. The preparation of adjusting entries is an application of the Accrual Concept of accounting and the Matching Principle.

• The Accrual Concept states that income is recognized when earned regardless of when collected and expense is recognized when incurred regardless of when paid.
• The Matching Principle aims to align expenses with revenues. Expenses should be recognized in the period when the revenues generated by such expenses are recognized.

The main purpose of adjusting entries is to update the accounts to conform with the accrual concept. At the end of the accounting period, some income and expenses may have not been recorded, taken up or updated; hence, there is a need to update the accounts. If adjusting entries are not prepared, some income, expense, asset, and liability accounts may not reflect their true values when reported in the financial statements. For this reason, adjusting entries are necessary.

Types of Adjusting Entries

Generally, there are 4 types of adjusting entries. Adjusting entries are prepared for the following:

• Accrued Income – income earned but not yet received
• Accrued Expense – expenses incurred but not yet paid
• Deferred Income – income received but not yet earned
• Prepaid Expense – expenses paid but not yet incurred

Adjusting entries are also made for:

• Depreciation
• Doubtful Accounts or Bad Debts, and other allowances