Imagine you have just finished all your books for an accounting period and found out that there is one account that you can definitely not adjust. Sounds like a time-saver, right? In the exacting world of accounting—where every entry needs to be accurate and in time—adjusting entries have an important role in making sure the financial information is correct. On the other hand, not all accounts are the same. Some of them, because of their very nature, do not require any adjustments.
If so, which account is most likely not to have an adjusting entry? We are going to explore this question to get an understanding of it, realize why it is important, and find out which entries are safe to leave.
Why Adjusting Entries Matter
It’s important to note that the goal of adjusting entries is fundamental here. At the end of an accounting period, a business is expected to record revenues and expenses in the period in which they were earned or incurred. This is to reconcile financial statements with the real financial situation of the business to the extent that we comply with the accrual basis of accounting.
Adjusting entries are the accounts that represent timing differences that concern transactions covering more than one period. They are generally characterized in the following ways:
- Accruals: Revenues or expenses that are either earned or incurred but haven’t been recorded yet.
- Deferrals: Money is changed hands before the revenue is earned or the expenses are incurred.
- Estimates: Non-cash corrections are such as those for depreciation or bad debts.
Common Accounts That Need Adjustments
Firstly, let’s take a look at some account types that almost always require adjusting entries.
Accrued Revenues and Expenses
These are income and expenditure that have taken place but are not yet recorded. For example, unpaid wages or services provided but not invoiced.
Prepaid Expenses
An example of this is when you pay the rent or insurance in advance, the account has to be adjusted to show the part that is consumed during the period.
Depreciation
Such things as machinery and vehicles are the assets that become less valuable with time. Adjusting entries spread the cost of the asset over its life to the various periods.
Unearned Revenue
If the customers pay in advance this is not the revenue, it is only the promise that they are obliged to fulfill and the revenue will remain unearned until the service is performed.
Adjustments make sure that revenues are registered.
So, What Kind Of Account Usually Does Not Need Adjustments?
Cash.
That’s right—cash accounts generally don’t require any adjusting entries.
Cash is always recorded for every transaction that takes place. The receipt or expenditure of cash is a rapid process that is both instant and conclusive. There is no such thing as deferral, accrual, or estimation in this case, hence no further adjusting entry is needed at the period-end.
Other Accounts That Barely Need Adjusting
Cash is the primary account that stands out as not requiring adjusting entries. But at times, some other accounts with rare needs for adjustments may exist depending on the nature of business operations.
1. Accounts Payable and Accounts Receivable
Transaction changes are immediately reflected in these accounts. Though, they might need to be corrected for bad debts (receivables) or missed discounts (payables) on a few occasions. However, under normal conditions, no adjustment at the end of the period is necessary.
2. Equity Accounts
Usually, the history of the common stock and retained earnings accounts does not contain frequent adjusting entries. These can be made if dividends, stock buybacks, or net income during closing entries are events that have happened.
3. Inventory
If a perpetual inventory system is used, inventory transactions are recorded immediately, so there is no need for adjusting entries. But, in case a periodic system is used, an adjustment is necessary to match the ending inventory.
4. Fixed Liabilities with Fixed Schedules
Generally, long-term loans with fixed and regular payment schedules do not require adjustments unless there is an unintentional payment, an additional one, or if the interest that has accumulated so far must be recorded separately.
Some Practical Examples
First of all, here are some examples:
- Cash: A company provides a service and gets a check for $2,000. The cash account is debited immediately. The transaction is complete unless there was a mistake in the recording.
- Accounts Payable : A supplier invoiced the company for the goods they delivered. That is entered into the system and no changes are required unless a discount has been agreed upon or a mistake has been made.
- Equity (Common Stock): As long as the company neither repurchases stock nor issues additional stock, the issued stock remains unchanged.
Accounting Clarity Starts with Understanding
Finding out that those accounts, which do not require adjusting entries, gives you a much deeper understanding of your financial statements. It indicates how good your books are between real-time transactions and those that need some accounting work to reflect correctly.
Most accounts go through the adjusting entry procedure to make sure that they are consistent with the accounting principles, but cash is the exception. This is the only account that shows just what is happening – at that very moment.
Therefore, if you are in the process of completing the books and are looking for ways to save time, it might be a good idea you remember that your cash account does not require adjusting entries.
