Accrual Accounting

Adjusting Entries

(Explanation)
Introduction to Accrual Accounting & Adjusting Entries
Adjusting entries are accounting journal entries that convert a company’s accounting records to the
accrual basis of accounting. An adjusting journal entry is typically made just prior to issuing a
company’s financial statements.

To demonstrate the need for an accounting adjusting entry let’s assume that a company borrowed money from
its bank on December 1, 2018 and that the company’s accounting period ends on December 31. The bank loan
specifies that the first interest payment on the loan will be due on March 1, 2019. This means that the
company’s accounting records as of December 31 do not contain any payment to the bank for the interest the
company incurred from December 1 through December 31. (Of course the loan is costing the company interest
expense every day, but the actual payment for the interest will not occur until March 1.)

For the company’s December income statement to accurately report the company’s profitability, it must
include all of the company’s December expenses—not just the expenses that were paid. Similarly, for the
company’s balance sheet on December 31 to be accurate, it must report a liability for the interest owed
as of the balance sheet date. An adjusting entry is needed so that December’s interest expense is
included on December’s income statement and the interest due as of December 31 is included on the
December 31 balance sheet. The adjusting entry will debit Interest Expense and credit Interest Payable
for the amount of interest from December 1 to December 31.

Another situation requiring an adjusting journal entry arises when an amount has already been recorded in the
company’s accounting records, but the amount is for more than the current accounting period. To illustrate let’s
assume that on December 1, 2018 the company paid its insurance agent $2,400 for insurance protection
during the period of December 1, 2018 through May 31, 2019. The $2,400 transaction was recorded in the
accounting records on December 1, but the amount represents six months of coverage and expense. By
December 31, one month of the insurance coverage and cost have been used up or expired. Hence the
income statement for December should report just one month of insurance cost of $400 ($2,400 divided by 6
months) in the account Insurance Expense. The balance sheet dated December 31 should report the cost of
five months of the insurance coverage that has not yet been used up. (The cost not used up is referred to as
the asset Prepaid Insurance. The cost that is used up is referred to as the expired cost Insurance Expense.)
This means that the balance sheet dated December 31 should report five months of insurance cost or $2,000
($400 per month times 5 months) in the asset account Prepaid Insurance. Since it is unlikely that the $2,400
transaction on December 1 was recorded this way, an adjusting entry will be needed at December 31, 2018 to
get the income statement and balance sheet to report this accurately.

The two examples of adjusting entries have focused on expenses, but adjusting entries also involve
revenues. This will be discussed later when we prepare adjusting journal entries.

For now we want to highlight some important points.

There are two scenarios where adjusting journal entries are needed before the financial statements
are issued:

• Nothing has been entered in the accounting records for certain expenses or revenues, but
those expenses and/or revenues did occur and must be included in the current period’s
income statement and balance sheet.
• Something has already been entered in the accounting records, but the amount needs to be
divided up between two or more accounting periods.
Adjusting entries almost always involve a

• balance sheet account (Interest Payable, Prepaid Insurance, Accounts Receivable, etc.) and an
• income statement account (Interest Expense, Insurance Expense, Service Revenues, etc.)

Adjusting Entries – Asset Accounts

Adjusting entries assure that both the balance sheet and the income statement are up-to-date on the
accrual basis of accounting. A reasonable way to begin the process is by reviewing the amount or
balance shown in each of the balance sheet accounts. We will use the following preliminary balance
sheet, which reports the account balances prior to any adjusting entries:

Parcel Delivery Service

Preliminary Balance Sheet-before adjusting entries
December 31, 2018

ASSETS LIABILITIES

Cash $ 1,800 Notes payable $ 5,000

Accounts receivable 4,600 Accounts payable 2,500
Supplies 1,100 Wages payable 1,200
Prepaid insurance 1,500 Unearned revenues 1,300
Equipment 25,000 Total liabilities 10,000
Accumulated depreciation (7,500)
OWNER’S EQUITY

Mary Smith, Capital 16,500

Total assets $ 26,500 Total liabilities & owner's equity $ 26,500

Let’s begin with the asset accounts:

Cash $1,800

The Cash account has a preliminary balance of $1,800—the amount in the general ledger. Before issuing
the balance sheet, one must ask, “Is $1,800 the true amount of cash? Does it agree to the amount
computed on the bank reconciliation?” The accountant found that $1,800 was indeed the true balance. (If
the preliminary balance in Cash does not agree to the bank reconciliation, entries are usually needed.
For example, if the bank statement included a service charge and a check printing charge—and they
were not yet entered into the company’s accounting records—those amounts must be entered into the
Cash account. See the major topic Bank Reconciliation for a thorough discussion and illustration of the
likely journal entries.)
Accounts Receivable $4,600

To determine if the balance in this account is accurate the accountant might review the detailed listing of
customers who have not paid their invoices for goods or services. (This is often referred to as the amount
of open or unpaid sales invoices and is often found in the accounts receivable subsidiary ledger.) When
those open invoices are sorted according to the date of the sale, the company can tell how old the
receivables are. Such a report is referred to as an aging of accounts receivable. Let’s assume the review
indicates that the preliminary balance in Accounts Receivable of $4,600 is accurate as far as the
amounts that have been billed and not yet paid.

However, under the accrual basis of accounting, the balance sheet must report all the amounts the company
has an absolute right to receive—not just the amounts that have been billed on a sales invoice. Similarly, the
income statement should report all revenues that have been earned—not just the revenues that have been
billed. After further review, it is learned that $3,000 of work has been performed (and therefore has been
earned) as of December 31 but won’t be billed until January 10. Because this $3,000 was earned in
December, it must be entered and reported on the financial statements for December.
An adjusting entry dated December 31 is prepared in order to get this information onto the
December financial statements.

To assist you in understanding adjusting journal entries, double entry, and debits and credits,
each example of an adjusting entry will be illustrated with a T-account.

Here is the process we will follow:

1. Draw two T-accounts. (Every journal entry involves at least two accounts. One account to
be debited and one account to be credited.)
2. Indicate the account titles on each of the T-accounts. (Remember that almost always one of
the accounts is a balance sheet account and one will be an income statement account. In a
smaller font size we will indicate the type of account next to the account title and we will also
indicate some tips about debits and credits within the T-accounts.)
3. Enter the preliminary balance in each of the T-accounts.
4. Determine what the ending balance ought to be for the balance sheet account.
5. Make an adjustment so that the ending amount in the balance sheet account is correct.
6. Enter the same adjustment amount into the related income statement account.
7. Write the adjusting journal entry.

Let’s follow that process here:

Accounts Receivable (balance sheet account)

Debit Credit
Increases an asset Decreases an asset

Preliminary Balance 4,600

ADJUSTING ENTRY 3,000
Correct Balance 7,600
 Service Revenues (income statement account)

Debit Credit
Decreases Revenues Increases Revenues

60,234 Preliminary Balance

3,000 ADJUSTING ENTRY
63,234 Correct Balance

The adjusting entry for Accounts Receivable in general journal format is:

Date Account Name Debit Credit

Dec. 31, 2018 Accounts Receivable 3,000

Service Revenues 3,000

Notice that the ending balance in the asset Accounts Receivable is now $7,600—the correct amount that
the company has a right to receive. The income statement account balance has been increased by the
$3,000 adjustment amount, because this $3,000 was also earned in the accounting period but had not yet
been entered into the Service Revenues account. The balance in Service Revenues will increase during
the year as the account is credited whenever a sales invoice is prepared. The balance in Accounts
Receivable also increases if the sale was on credit (as opposed to a cash sale). However, Accounts
Receivable will decrease whenever a customer pays some of the amount owed to the company.
Therefore the balance in Accounts Receivable might be approximately the amount of one month’s sales,
if the company allows customers to pay their invoices in 30 days.

At the end of the accounting year, the ending balances in the balance sheet accounts (assets and
liabilities) will carry forward to the next accounting year. The ending balances in the income
statement accounts (revenues and expenses) are closed after the year’s financial statements are
prepared and these accounts will start the next accounting period with zero balances.

Allowance for Doubtful Accounts $0

(It is common not to list accounts with $0 balances on balance sheets.)

Although the Allowance for Doubtful Accounts does not appear on the preliminary balance sheet, experienced
accountants realize that it is likely that some of the accounts receivable might not be collected. (This could
occur because some customers will have unforeseen hardships, some customers might be dishonest, etc.) If
some of the $4,600 owed to the company will not be collected, the company’s balance sheet should report
less than $4,600 of accounts receivable. However, rather than reducing the balance in Accounts Receivable
by means of a credit amount, the credit amount will be reported in Allowance for Doubtful Accounts. (The
combination of the debit balance in Accounts Receivable and the credit balance in Allowance for Doubtful
Accounts is referred to as the net realizable value.)
Let’s assume that a review of the accounts receivables indicates that approximately $600 of the
receivables will not be collectible. This means that the balance in Allowance for Doubtful Accounts
should be reported as a $600 credit balance instead of the preliminary balance of $0. The two accounts
involved will be the balance sheet account Allowance for Doubtful Accounts and the income statement
account Bad Debts Expense.

Allowance for Doubtful Accounts (balance sheet account)

Debit Credit
Decreases a contra asset Increases a contra asset

0 Preliminary Balance
600 ADJUSTING ENTRY
600 Correct Balance

Bad Debts Expense (income statement account)

Debit Credit
Increases an expense Decreases an expense

Preliminary Balance 0
ADJUSTING ENTRY 600
Correct Balance 600

The adjusting journal entry for Allowance for Doubtful Accounts is:

Date Account Name Debit Credit

Dec. 31, 2018 Bad Debts Expense 600

Allowance for Doubtful Accounts 600

It is possible for one or both of the accounts to have preliminary balances. However, the balances are
likely to be different from one another. Because Allowance for Doubtful Accounts is a balance sheet
account, its ending balance will carry forward to the next accounting year. Because Bad Debt Expense
is an income statement account, its balance will not carry forward to the next year. Bad Debts Expense
will start the next accounting year with a zero balance.
The Supplies account has a preliminary balance of $1,100. However, a count of the supplies actually on hand
indicates that the true amount of supplies is $725. This means that the preliminary balance is too high by $375
($1,100 minus $725). A credit of $375 will need to be entered into the asset account in order to reduce the
balance from $1,100 to $725. The related income statement account is Supplies Expense.

Supplies (balance sheet account)

Debit Credit
Increases an asset Decreases an asset

Preliminary Balance 1,100

375 ADJUSTING ENTRY
Correct Balance 725

Supplies Expense (income statement account)

Debit Credit
Increases an expense Decreases an expense

Preliminary Balance 1,600

ADJUSTING ENTRY 375
Correct Balance 1,975

The adjusting entry for Supplies in general journal format is:

Date Account Name Debit Credit

Dec. 31, 2018 Supplies Expense 375

Supplies 375

Notice that the ending balance in the asset Supplies is now $725—the correct amount of supplies that the
company actually has on hand. The income statement account Supplies Expense has been increased by
the $375 adjusting entry. It is assumed that the decrease in the supplies on hand means that the supplies
have been used during the current accounting period. The balance in Supplies Expense will increase
during the year as the account is debited. Supplies Expense will start the next accounting year with a
zero balance. The balance in the asset Supplies at the end of the accounting year will carry over to the
next accounting year.
Prepaid Insurance $1,500

The $1,500 balance in the asset account Prepaid Insurance is the preliminary balance. The correct
balance needs to be determined. The correct amount is the amount that has been paid by the company
for insurance coverage that will expire after the balance sheet date. If a review of the payments for
insurance shows that $600 of the insurance payments is for insurance that will expire after the balance
sheet date, then the balance in Prepaid Insurance should be $600. All other amounts should be
charged to Insurance Expense.

Prepaid Insurance (balance sheet account)

Debit Credit
Increases an asset Decreases an asset

Preliminary Balance 1,500

900 ADJUSTING ENTRY
Correct Balance 600

Insurance Expense (income statement account)

Debit Credit
Increases an expense Decreases an expense

Preliminary Balance 1,000

ADJUSTING ENTRY 900
Correct Balance 1,900

The adjusting journal entry for Prepaid Insurance is:

Date Account Name Debit Credit

Dec. 31, 2018 Insurance Expense 900

Prepaid Insurance 900

Note that the ending balance in the asset Prepaid Insurance is now $600—the correct amount of
insurance that has been paid in advance. The income statement account Insurance Expense has been
increased by the $900 adjusting entry. It is assumed that the decrease in the amount prepaid was the
amount being used or expiring during the current accounting period. The balance in Insurance Expense
starts with a zero balance each year and increases during the year as the account is debited. The
balance at the end of the accounting year in the asset Prepaid Insurance will carry over to the next
accounting year.
Equipment $25,000

Equipment is a long-term asset that will not last indefinitely. The cost of equipment is recorded in the
account Equipment. The $25,000 balance in Equipment is accurate, so no entry is needed in this
account. As an asset account, the debit balance of $25,000 will carry over to the next accounting year.

Accumulated Depreciation - Equipment $7,500

Accumulated Depreciation - Equipment is a contra asset account and its preliminary balance of $7,500 is the
amount of depreciation actually entered into the account since the Equipment was acquired. The correct
balance should be the cumulative amount of depreciation from the time that the equipment was acquired
through the date of the balance sheet. A review indicates that as of December 31 the accumulated amount of
depreciation should be $9,000. Therefore the account Accumulated Depreciation
- Equipment will need to have an ending balance of $9,000. This will require an additional $1,500
credit to this account. The income statement account that is pertinent to this adjusting entry and which
will be debited for $1,500 is Depreciation Expense - Equipment.

Accumulated Depreciation - Equipment (balance sheet acct)

Debit Credit
Decreases a contra asset Increases a contra asset

7,500 Preliminary Balance

1,500 ADJUSTING ENTRY
9,000 Correct Balance

Depreciation Expense - Equipment (income statement acct)

Debit Credit
Increases an expense Decreases an expense

Preliminary Balance 0
ADJUSTING ENTRY 1,500
Correct Balance 1,500

The adjusting entry for Accumulated Depreciation in general journal format is:

Date Account Name Debit Credit

Dec. 31, 2018 Depreciation Expense - Equipment 1,500

Accumulated Depreciation - Equipment 1,500
The ending balance in the contra asset account Accumulated Depreciation - Equipment at the end of the
accounting year will carry forward to the next accounting year. The ending balance in Depreciation
Expense - Equipment will be closed at the end of the current accounting period and this account will
begin the next accounting year with a balance of $0.

Adjusting Entries – Liability Accounts

Notes Payable $5,000

Notes Payable is a liability account that reports the amount of principal owed as of the balance sheet date.
(Any interest incurred but not yet paid as of the balance sheet date is reported in a separate liability account
Interest Payable.) The accountant has verified that the amount of principal actually owed is the same as the
amount appearing on the preliminary balance sheet. Therefore, no entry is needed for this account.

Interest Payable $0

(It is common not to list accounts with $0 balances on balance sheets.)

Interest Payable is a liability account that reports the amount of interest the company owes as of the balance
sheet date. Accountants realize that if a company has a balance in Notes Payable, the company should
be reporting some amount in Interest Expense and in Interest Payable. The reason is that each day
that the company owes money it is incurring interest expense and an obligation to pay the interest.
Unless the interest is paid up to date, the company will always owe some interest to the lender.

Let’s assume that the company borrowed the $5,000 on December 1 and agrees to make the first interest
payment on March 1. If the loan specifies an annual interest rate of 6%, the loan will cost the company interest
of $300 per year or $25 per month. On March 1 the company will be required to pay $75 of interest. On the
December income statement the company must report one month of interest expense of $25. On the
December 31 balance sheet the company must report that it owes $25 as of December 31 for interest.

Interest Payable (balance sheet account)

Debit Credit
Decreases a liability Increases a liability

0 Preliminary Balance
25 ADJUSTING ENTRY
25 Correct Balance
“
 Interest Expense (income statement account)

Debit Credit
Increases an expense Decreases an expense

Preliminary Balance 0
ADJUSTING ENTRY 25
Correct Balance 25

The adjusting journal entry for Interest Payable is:

Date Account Name Debit Credit

Dec. 31, 2018 Interest Expense 25

Interest Payable 25

It is unusual that the amount shown for each of these accounts is the same. In the future months the
amounts will be different. Interest Expense will be closed automatically at the end of each accounting
year and will start the next accounting year with a $0 balance.

Accounts Payable $2,500

Accounts Payable is a liability account that reports the amounts owed to suppliers or vendors as of the
balance sheet date. Amounts are routinely entered into this account after a company has received and
verified all of the following: (1) an invoice from the supplier, (2) goods or services have been received,
and (3) compared the amounts to the company’s purchase order. A review of the details confirms that
this account’s balance of $2,500 is accurate as far as invoices received from vendors.
However, under the accrual basis of accounting the balance sheet must report all the amounts owed by
the company—not just the amounts that have been entered into the accounting system from vendor
invoices. Similarly, the income statement must report all expenses that have been incurred—not merely
the expenses that have been entered from a vendor’s invoice. To illustrate this, assume that a company
had $1,000 of plumbing repairs done in late December, but the company has not yet received an invoice
from the plumber. The company will have to make an adjusting entry to record the expense and the
liability on the December financial statements. The adjusting entry will involve the following accounts:

Accounts Payable (balance sheet account)

Debit Credit
Decreases a liability Increases a liability

2,500 Preliminary Balance

1,000 ADJUSTING ENTRY
3,500 Correct Balance

Repairs & Maintenance Expense (income statement acct)

Debit Credit
Increases an expense Decreases an expense

Preliminary Balance 7,870

ADJUSTING ENTRY 1,000
Correct Balance 8,870

The adjusting entry for Accounts Payable in general journal format is:

Date Account Name Debit Credit

Dec. 31, 2018 Repairs & Maintenance Expense 1,000

Accounts Payable 1,000

The balance in the liability account Accounts Payable at the end of the year will carry forward to the next
accounting year. The balance in Repairs & Maintenance Expense at the end of the accounting year will
be closed and the next accounting year will begin with $0.
Wages Payable $1,200

Wages Payable is a liability account that reports the amounts owed to employees as of the balance
sheet date. Amounts are routinely entered into this account when the company’s payroll records are
processed. A review of the details confirms that this account’s balance of $1,200 is accurate as far as the
payrolls that have been processed.

However, under the accrual basis of accounting the balance sheet must report all of the payroll
amounts owed by the company—not just the amounts that have been processed. Similarly, the income
statement must report all of the payroll expenses that have been incurred—not merely the expenses
from the routine payroll processing. For example, assume that December 30 is a Sunday and the first
day of the payroll period. The wages earned by the employees on December 30-31 will be included in
the payroll processing for the week of December 30 through January 5. However, the December
income statement and the December 31 balance sheet need to include the wages for December 30-31,
but not the wages for January 1-5. If the wages for December 30-31 amount to $300, the following
adjusting entry is required as of December 31:

Wages Payable (balance sheet account)

Debit Credit
Decreases a liability Increases a liability

1,200 Preliminary Balance

300 ADJUSTING ENTRY
1,500 Correct Balance

Wages Expense (income statement account)

Debit Credit
Increases an expense Decreases an expense

Preliminary Balance 13,120

ADJUSTING ENTRY 300
Correct Balance 13,420

The adjusting journal entry for Wages Payable is:

Date Account Name Debit Credit

Dec. 31, 2018 Wages Expense 300

Wages Payable 300
The $1,500 balance in Wages Payable is the true amount not yet paid to employees for their work through
December 31. The $13,420 of Wages Expense is the total of the wages used by the company through
December 31. The Wages Payable amount will be carried forward to the next accounting year. The Wages
Expense amount will be zeroed out so that the next accounting year begins with a $0 balance.

Unearned Revenues $1,300

Unearned Revenues is a liability account that reports the amounts received by a company but have not
yet been earned by the company. For example, if a company required a customer with a poor credit
rating to pay $1,300 before beginning any work, the company increases its asset Cash by $1,300 and it
should increase its liability Unearned Revenues by $1,300.

As the company does the work, it will reduce the Unearned Revenues account balance and increase its
Service Revenues account balance by the amount earned (work performed). A review of the balance in
Unearned Revenues reveals that the company did indeed receive $1,300 from a customer earlier in
December. However, during the month the company provided the customer with $800 of services.
Therefore, at December 31 the amount of services due to the customer is $500.

Let’s visualize this situation with the following T-accounts:

Unearned Revenues (balance sheet account)

Debit Credit
Decreases a liability Increases a liability

1,300 Preliminary Balance

ADJUSTING ENTRY 800
500 Correct Balance

Service Revenues (income statement account)

Debit Credit
Decreases revenues Increases revenues

63,234 Preliminary Balance

800 ADJUSTING ENTRY
64,034 Correct Balance
The adjusting entry for Unearned Revenues in general journal format is:

Date Account Name Debit Credit

Dec. 31, 2018 Unearned Revenues 800

Service Revenues 800

Since Unearned Revenues is a balance sheet account, its balance at the end of the accounting year
will carry over to the next accounting year. On the other hand Service Revenues is an income
statement account and its balance will be closed when the current year is over. Revenues and
expenses always start the next accounting year with $0.

Accruals and Deferrals

Adjusting entries are often sorted into two groups: accruals and deferrals.

Accruals

Accruals (or accrual-type adjusting entries) involve both expenses and revenues and are associated
with the first scenario mentioned in the introduction to this topic:

• Nothing has been entered in the accounting records for certain expenses and/or revenues, but
those expenses and/or revenues did occur and must be included in the current period’s
income statement and balance sheet.

Accrual of Expenses

An accountant might say, “We need to accrue the interest expense on the bank loan.” That statement is
made because nothing had been recorded in the accounts for interest expense, but the company did
indeed incur interest expense during the accounting period. Further, the company has a liability or
obligation for the unpaid interest up to the end of the accounting period. What the accountant is saying is
that an accrual-type adjusting journal entry needs to be recorded.

The accountant might also say, “We need to accrue for the wages earned by the employees on Sunday,
December 30, and Monday, December 31.” This means that an accrual-type adjusting entry is needed
because the company incurred wages expenses on December 30-31 but nothing will be entered
routinely into the accounting records by the end of the accounting period on December 31.

A third example is the accrual of utilities expense. Utilities provide the service (gas, electric, telephone)
and then bill for the service they provided based on some type of metering. As a result the company will
incur the utility expense before it receives a bill and before the accounting period ends. Hence, an
accrual-type adjusting journal entry must be made in order to properly report the correct amount of
utilities expenses on the current period’s income statement and the correct amount of liabilities on the
balance sheet.
Accountants also use the term “accrual” or state that they must “accrue” when discussing revenues that
fit the first scenario. For example, an accountant might say, “We need to accrue for the interest the
company has earned on its certificate of deposit.” In that situation the company probably did not
receive any interest nor did the company record any amounts in its accounts, but the company did
indeed earn interest revenue during the accounting period. Further the company has the right to the
interest earned and will need to list that as an asset on its balance sheet.

Similarly, the accountant might say, “We need to prepare an accrual-type adjusting entry for the revenues we
earned by providing services on December 31, even though they will not be billed until January.”

Deferrals

Deferrals or deferral-type adjusting entries can pertain to both expenses and revenues and refer to the
second scenario mentioned in the introduction to this topic:

• Something has already been entered in the accounting records, but the amount needs to be
divided up between two or more accounting periods.

Deferral of Expenses

An accountant might say, “We need to defer some of the insurance expense.” That statement is made
because the company may have paid on December 1 the entire bill for the insurance coverage for the
six-month period of December 1 through May 31. However, as of December 31 only one month of the
insurance is used up. Hence the cost of the remaining five months is deferred to the balance sheet
account Prepaid Insurance until it is moved to Insurance Expense during the months of January
through May. If the company prepares monthly financial statements, a deferral-type adjusting entry may
be needed each month in order to move one-sixth of the six-month cost from the asset account Prepaid
Insurance to the income statement account Insurance Expense.

The accountant might also say, “We need to defer some of the cost of supplies.” This deferral is
necessary because some of the supplies purchased were not used or consumed during the accounting
period. An adjusting entry will be necessary to defer to the balance sheet the cost of the supplies not
used, and to have only the cost of supplies actually used being reported on the income statement. The
costs of the supplies not yet used are reported in the balance sheet account Supplies and the cost of
the supplies used during the accounting period are reported in the income statement account Supplies
Expense.

Deferral of Revenues

Deferrals also involve revenues. For example if a company receives $600 on December 1 in exchange
for providing a monthly service from December 1 through May 31, the accountant should “defer” $500 of
the amount to a liability account Unearned Revenues and allow $100 to be recorded as December
service revenues. The $500 in Unearned Revenues will be deferred until January through May when it
will be moved with a deferral-type adjusting entry from Unearned Revenues to Service Revenues at a
rate of $100 per month.
Avoiding Adjusting Entries
If you want to minimize the number of adjusting journal entries, you could arrange for each period’s
expenses to be paid in the period in which they occur. For example, you could ask your bank to charge
your company’s bank account at the end of each month with the current month’s interest on your
company’s loan from the bank. Under this arrangement December’s interest expense will be paid in
December, January’s interest expense will be paid in January, etc. You simply record the interest
payment and avoid the need for an adjusting entry. Similarly, your insurance company might
automatically charge your company’s bank account each month for the insurance expense that applies to
just that one month.