Final answer:
Adjusting entries in accounting include accruals, deferrals, and estimates. These entries are made to ensure that financial statements reflect the correct balances and transactions. Estimates are based on approximations and are used for items such as depreciation expense or allowance for doubtful accounts.
Step-by-step explanation:
In accounting, adjusting entries are made at the end of the accounting period to ensure that financial statements reflect the correct balances and transactions. There are several types of adjusting entries:
- Accruals: These entries record revenues or expenses that have been earned or incurred but have not yet been recorded in the books. For example, if a company provides services to a customer in December but has not yet billed for them, an accrual entry would be made to recognize the revenue.
- Deferrals: These entries defer the recognition of revenues or expenses to future accounting periods. For example, if a company receives payment for services in advance, a deferral entry would be made to recognize the revenue in the period when the services are actually provided.
- Estimates: These entries are made to account for estimated amounts that cannot be precisely determined. For example, if a company estimates that a portion of its accounts receivable will be uncollectible, it would make an estimate entry to reflect this.
Estimated items refer to the amounts that are based on estimates, such as depreciation expense or allowance for doubtful accounts. These items are included in the financial statements to provide a more accurate representation of the company's financial position and performance.