What is an example of an accrual adjusting entry?

An accrual adjusting entry recognizes revenues that have been earned but not yet received and expenses that have been incurred but not yet paid. Recording interest income earned but not yet received is a perfect example of this concept. In this case, interest has accumulated based on an agreement or investment, but the actual cash payment has not yet been received at the time the financial statements are being prepared.

This entry ensures that the revenues are matched with the period in which they are earned, adhering to the accrual basis of accounting. By making this adjustment, the financial statements reflect a more accurate view of the company’s financial position, as it acknowledges income that has been earned, thereby enhancing the integrity and reliability of the financial reports.

In contrast, recording prepaid rent and recorded depreciation do not illustrate accrual accounting because they pertain to prepayments or allocations of expenses based on the passage of time rather than the recognition of revenue that has been earned. Recording cash sales reflects actual cash transactions rather than accounting that recognizes revenue based on the earning process, so it is not an accrual adjustment.