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This video demonstrates how to prepare adjusting entries to record revenues when they are earned and expenses when they are incurred. Adjusting entries are prepared at the end of each accounting period to convert a company's records to the accrual basis of accounting. The main purpose is to match incomes and expenses to the appropriate accounting periods. Each adjusting entry involves one income statement account and one balance sheet account. Adjusting entries are needed in cases of deferrals and accruals. Deferrals include prepaid expenses (expenses paid in advance and recorded as assets) and unearned revenues (revenues received in advance and recorded as liabilities). Accruals include accrued revenues (revenues for services performed) and accrued expenses.
