What are the two main types of adjusting entries?

Study for the AIPB Mastering Adjusting Entries Test. Use flashcards and multiple choice questions with hints and explanations. Prepare effectively for your exam!

Adjusting entries are essential in the accounting cycle to ensure that the financial statements reflect the true financial position of a business at the end of an accounting period. The two main types of adjusting entries are accruals and deferrals.

Accruals involve adjusting entries for revenues that have been earned but not yet received in cash, or expenses that have been incurred but not yet paid. This type of entry helps to ensure that income and expenses are recognized in the period in which they occur, aligning with the accrual basis of accounting. For example, if a company provides services in December but invoices the customer in January, an accrual entry is made to recognize the revenue in December.

Deferrals, on the other hand, relate to cash transactions that have been recorded but need to be allocated over multiple periods. This includes prepaid expenses and unearned revenues. For instance, if a company pays rent in advance for several months, that expense is initially recorded as an asset and then adjusted periodically to reflect the expense in the correct accounting periods.

In summary, understanding accruals and deferrals is crucial for accurately capturing financial activity and adhering to accounting principles, ensuring that income and expenses are reported in the period they relate to, which is precisely why this answer

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