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Making Adjusting Entries for Otherwise Unrecorded Items-2

Filed under Finance.

accounting periods, adjusting entries, closing the books, daily transactions, end-of-period closing, general journals, accounting, bookkeeping, managing business finances, accrued property tax, accrual accounting, adjusting entries, taxes payable, accrued FICA, employment.

Certain end-of-period adjustments must be made when you close your books. Adjusting entries are made at the end of an accounting period to account for items that don't get recorded in your daily transactions. In a traditional accounting system, adjusting entries are made in a general journal.

Some adjusting entries are straightforward. Others require judgment and some accounting knowledge. You will have to decide if you are going to tackle some or all adjusting entries, or if you want to pay your accountant to do them. If your accountant prepares adjusting entries, he or she should give you a copy of these entries so that you can enter them in your general ledger.

The following are typical items that might require adjusting journal entries. Some, but not all, should apply to your business:

  • Accrue wages earned by employees but not yet paid to them.
  • Accrue employer share of FICA taxes due.
  • Accrue property taxes.
  • Record interest expense paid on a mortgage or loan and update the loan balance.
  • Record prepaid insurance.
  • Adjust your books for inventory on hand at period end.
  • Accrue interest income earned but not yet received.
  • Record depreciation expense.
  • Adjust for bad debts.
  • Accrue dividends payable if a corporation.
  • Accrue income taxes payable if a corporation.
  • Account for the sale of fixed assets.
  • Set up accounts receivable balance if your day-to-day books are maintained on a cash basis.
  • Set up accounts payable balance if your day-to-day books are maintained on a cash basis.

After all adjusting entries are made, do the following to complete your books for the accounting period:

  1. Foot the general journal.
  2. Post the general journal totals to the general ledger.
  3. Foot the general ledger accounts to arrive at the final, adjusted balance for each account.
  4. Prepare an adjusted trial balance using the general ledger balances.
  5. Prepare financial statements using the adjusted trial balance.

Accruing Wages Payable

If you have employees, chances are you owe them a certain amount of wages at the end of an accounting period. If so, an adjusting entry is required in your general journal.

Example

As an example, on December 31, 2010 you owe your employees one week of salary that will be paid on January 7, 2011. The gross wages for that week are $1,512.00. Make the following general journal entry:


Debit Credit
Wages expense 1,512
Accrued wages
1,512
To accrue wages owed but unpaid on 12/31/2010

Accruing Employer FICA Taxes

One component of the payroll taxes you deposit with the government is FICA tax (made up of Social Security and Medicare taxes) One-half of the FICA you pay is withheld from employees; the other half is your share (an expense of the business). If you have payroll taxes due at the end of an accounting period that will be paid next period, you should accrue the employer share of FICA that is due at period end. This is done with an adjusting entry in your general journal.

Example

As an example of accrued FICA taxes, let's say that on January 4, 2011, you deposit payroll taxes due as of December 31, 2010. The deposit includes FICA taxes of $420.50. One-half of that ($210.25) is the employer share that has not yet been recorded on the books. Make the following general journal entry:


Debit Credit
Payroll taxes expense 210.25
Payroll taxes payable
210.25
To accrue employer share of FICA owed but unpaid on 12/31/2010

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