Accounting Adjustment. What it is and how to do it

Riskallay

11/5/2023

7 min

In order for the accounting result of the year to reflect the reality of the company, there is the figure of the accounting adjustment, which implies a correction made at the end of the year, in order to properly allocate income, expenses, liabilities and assets to the corresponding fiscal year.

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This may be due to revenues and expenses recorded for another fiscal year, or revenues and expenses not yet recorded in the current fiscal year.

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What is the accounting adjustment

Accounting adjustments are actions taken by the financial area of the organization to correct or enter expenses, assets or liabilities incurred during the respective period.

Adjustments are usually made on an annual basis; however, through this figure, companies are able to correct expenses or income that were not included in the current accounting period or in the immediately preceding period.

This figure is very important in those economies with inflation indexes, for which reason there is depreciation in assets and fluctuations in exchange rates that generate changes in the statement of income.

Objectives of the accounting adjustment

Normally, during the accounting period, organizations may record numerous income and expense transactions. However, at the closing date of the fiscal year, which normally occurs on December 31 of each year, there may be entries or outflows that belong to previous fiscal years or that are unaccounted for and belong to the current fiscal year.

In these cases, using the accrual basis, the correct accounting result for the current year is obtained.

Types of accounting adjustments

There are different types of accounting adjustments, the most relevant of which are listed below:

Adjustment for depreciation of fixed assets

Amortization involves the depreciation of an asset or liability.

On the other hand, fixed assets are those goods and rights -acquired or manufactured by the company- that are destined in a lasting manner to the main line of business and that tend to lose value, whether due to the passage of time, use, etc., forming part of the company's non-current assets.

In these cases, a depreciation coefficient is applied to the valuation of the fixed assets to obtain the depreciation charge and, thus, account for it as an expense and reduce the accounting profit.

This type of adjustment is usually made at year-end or at the time of sale of the fixed asset.

Adjustment for impairment

Generally, due to contextual issues, business assets lose value.

But this deterioration not only affects fixed assets but also assets; for example, if we have stored goods and due to a storm these materials deteriorate or get wet, they lose their initial value.

When this occurs, an adjustment is made and recorded as an expense, resulting in a reduction of the accounting results. In these cases, the adjustment can be made immediately or at the end of the accounting period.

Regularization of inventories

At the close of the accounting period, which is usually determined on December 31 of each year, a valuation is made of the final stock on deposit in order to determine the differences between the initial stock on January 1 and the final stock in the warehouse.

This entry is called variation in inventories. If, at December 31, inventories increase, they are recorded as income, while if they decrease, they are recorded as an expense.

Accrual of expenses and income (prepaid expenses and income)

This type of adjustment makes it possible to allocate income and expenses to the corresponding fiscal year. In reality, these are revenues and expenses that are booked in the current fiscal year, but which belong to future fiscal years. This is why they are called "prepaid expenses or revenues". Accruals and deferrals are always made at the year-end closing date.

Reclassification from long to short term

The adjustment is made in those cases in which there is debt that, although recorded as long-term, in the accounting period of the following year, is already short-term debt.

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Accounting adjustment entry process

As already mentioned, the accounting adjustment entry is made at the end of an accounting period, so that they reflect the real and updated situation of the company's accounts and ensure that the accounting result obtained is correct.

There are events that alter the results of the current fiscal year, such as, for example, the recording of motorcycles that belong to other accounting periods; the recording of transactions of a fiscal year that are not reflected in the corresponding fiscal year, or when the recording is pending during an accounting period.

When the accounting adjustments of the companies are made

Generally, organizations make accounting adjustments at year-end (usually December 31) to correct differences in the recording of revenues and expenses, assets and liabilities, in order to adjust them for the corresponding accounting period.

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