What Is an Adjusting Journal Entry?

An adjusting journal entry is an entry in a company’s general ledger that occurs at the end of an accounting period to record any unrecognized income or expenses for the period. When a transaction is started in one accounting period and ended in a later period, an adjusting journal entry is required to properly account for the transaction.

Adjusting journal entries can also refer to financial reporting that corrects a mistake made previously in the accounting period.

Understanding Adjusting Journal Entries

The purpose of adjusting entries is to convert cash transactions into the accrual accounting method. Accrual accounting is based on the revenue recognition principle that seeks to recognize revenue in the period in which it was earned, rather than the period in which cash is received.

As an example, assume a construction company begins construction in one period but does not invoice the customer until the work is complete in six months. The construction company will need to do an adjusting journal entry at the end of each of the months to recognize revenue for 1/6 of the amount that will be invoiced at the six-month point.

An adjusting journal entry involves an income statement account (revenue or expense) along with a balance sheet account (asset or liability). It typically relates to the balance sheet accounts for accumulated depreciation, allowance for doubtful accounts, accrued expenses, accrued income, prepaid expenses, deferred revenue, and unearned revenue.

Income statement accounts that may need to be adjusted include interest expense, insurance expense, depreciation expense, and revenue. The entries are made in accordance with the matching principle to match expenses to the related revenue in the same accounting period. The adjustments made in journal entries are carried over to the general ledger that flows through to the financial statements.

Types of Adjusting Journal Entries

In summary, adjusting journal entries are most commonly accruals, deferrals, and estimates.

Accruals

Accruals are revenues and expenses that have not been received or paid, respectively, and have not yet been recorded through a standard accounting transaction. For instance, an accrued expense may be rent that is paid at the end of the month, even though a firm is able to occupy the space at the beginning of the month that has not yet been paid.

Deferrals

Deferrals refer to revenues and expenses that have been received or paid in advance, respectively, and have been recorded, but have not yet been earned or used. Unearned revenue, for instance, accounts for money received for goods not yet delivered.

Estimates

Estimates are adjusting entries that record non-cash items, such as depreciation expense, allowance for doubtful accounts, or the inventory obsolescence reserve.

Why Are Adjusting Journal Entries Important?

Because many companies operate where actual delivery of goods may be made at a different time than payment (either beforehand in the case of credit or afterward in the case of pre-payment), there are times when one accounting period will end with such a situation still pending. In such a case, the adjusting journal entries are used to reconcile these differences in the timing of payments as well as expenses. Without adjusting entries to the journal, there would remain unresolved transactions that are yet to close.

Example of an Adjusting Journal Entry

For example, a company that has a fiscal year ending December 31 takes out a loan from the bank on December 1. The terms of the loan indicate that interest payments are to be made every three months. In this case, the company’s first interest payment is to be made March 1. However, the company still needs to accrue interest expenses for the months of December, January, and February.

Since the firm is set to release its year-end financial statements in January, an adjusting entry is needed to reflect the accrued interest expense for December. To accurately report the company’s operations and profitability, the accrued interest expense must be recorded on the December income statement, and the liability for the interest payable must be reported on the December balance sheet. The adjusting entry will debit interest expense and credit interest payable for the amount of interest from December 1 to December 31.

What Is Affirmative Action?

The term affirmative action refers to a policy aimed at increasing workplace and educational opportunities for people who are underrepresented in various areas of our society.

Affirmative action focuses on demographics with historically low representation in leadership, professional, and academic roles. It is often considered a means of countering discrimination against particular groups.

Affirmative action programs are commonly implemented by businesses and governments by taking individuals’ race, sex, religion, or national origin into account when hiring.

How Affirmative Action Works

The main purpose of affirmative action is to diversify various parts of society. It is a government-backed policy that was developed to provide inadequately represented groups of people with access to opportunities in academia, the private workforce, and government jobs.

These opportunities include admission to schools and jobs in professional positions, as well as access to housing and financing.

History and Implementation

The affirmative action policy rose to prominence in the United States in the 1960s as a way to promote equal opportunity for various segments of society. The policy was developed to enforce the Civil Rights Act of 1964, which sought to eliminate discrimination.

Early implementations of affirmative action largely focused on halting the continued social segregation of minorities and other disadvantaged individuals from institutions and opportunities.

Despite legislation that outlawed discrimination practices in the U.S., tangible change in the status quo was not immediate.

In more recent years, campaigns have expanded to make organizations and institutions even more inclusive by pushing for greater gender diversity. Newer policies are also aimed at providing more access to opportunities for covered veterans and people with disabilities.

Elements of Affirmative Action

Efforts to stimulate change can take the form of financial assistance such as grants, scholarships, and other support earmarked to help with access to higher education opportunities.

In addition, hiring practices may be structured to require the inclusion of diverse candidates for consideration for job openings. Government agencies may mandate that companies and institutions populate their ranks with a minimum percentage of qualified professionals from varying ethnicities, genders, and cultures.

Failure to meet such requirements could disqualify institutions from receiving government funding or being able to compete for public contracts.

Examples of Affirmative Action

Affirmative action has been put to work since the 1960s, despite lack of progress at times and rulings by legal authorities such as the Supreme Court that have hindered it. Here are some examples of the policy in action.

• In 1965, President Lyndon B. Johnson issued Executive Order 11246. It required that all government contractors and subcontractors expand job opportunities for minorities. It also established the Office of Federal Contract Compliance (OFCC) to enforce the order.
• In 1970, the Labor Department ordered and authorized flexible goals and timetables to address the underutilization of minorities by federal contractors. In 1971, women were included in the order.
• In 1973, President Richard M. Nixon signed the Rehabilitation Act of 1973. It required agencies to submit an affirmative action plan to the EEOC that detailed the hiring, placement, and advancement of individuals with disabilities.
• In 1983, President Ronald Reagan issued Executive Order 12432. It required every federal agency with substantial procurement or grant-making authority to develop a Minority Business Enterprise development plan.
• In 1990, President George H.W. Bush signed the Americans with Disabilities Act. A year later, he signed the Civil Rights Act of 1991.
• In 1998, the U. S. House of Representatives and the U. S. Senate stopped attempts to eliminate specific affirmative action programs. Both houses of Congress prohibited the abolishment of the Disadvantaged Business Enterprise program. In addition, the House refused to allow the elimination of affirmative action in admissions in higher education programs funded through the Higher Education Act.
• In 2022, the Wall Street Journal reported that dozens of major U.S. companies including Apple, Alphabet, American Airlines, and General Motors were urging the Supreme Court to uphold the continued use affirmative action policies in college admissions. They asserted that greater diversity on college campuses contributed to ongoing innovation in commerce and successful business endeavors.

Advantages and Disadvantages of Affirmative Action

The implementation and continued use of affirmative action policies have drawn strong support as well as staunch criticism.

Advantages

An obvious benefit of affirmative action is the opportunities they provide to people who otherwise might not have them. These opportunities include access to education for students who may be disadvantaged and career advancement for employees who may be blocked from rising up the corporate ladder.

Proponents of affirmative action say that the effort must continue because of the low percentages of diversity in positions of authority and in the media, as well as limited acknowledgment of the achievements of marginalized or unrepresented groups.

Disadvantages

Opponents of affirmative action frequently call these efforts a collective failure. They cite as evidence the tiny changes to the status quo after decades of effort. The cost of such programs, coupled with a belief that affirmative action forces the populace to make unwarranted accommodations, drives a significant part of the opposition.

Certain individuals believe that there is little to no bias in society. They argue that affirmative action results in reverse discrimination, which can often lead to qualified candidates being overlooked in academics and the workplace in favor of less qualified candidates who meet policy standards.

Affirmative Action Statistics

Affirmative action is a very controversial topic and often leads to heated debates between those who support it and people who feel it doesn’t benefit society. Is there a way to quantify how people feel and how it’s working?

According to a Gallup poll, more than half of Americans (61%) believe in affirmative action policies. This level of support has increased since the last poll, where only 47% to 50% of individuals thought affirmative action was necessary. This increase in support is especially important, given the active issues surrounding race and identity in the U.S. and elsewhere.

Many Americans feel positive about diversity. They are comfortable with the makeup of their communities, saying diversity positively impacts society as a whole.

There is some divide when it comes to identifying race and ethnicity for purposes of hiring. In fact, about 74% of individuals feel that a candidate’s racial or ethnic background shouldn’t be considered when hiring or promoting them. These activities should only be based on someone’s merit and qualifications.

What Are Agency Costs?

An agency cost is a type of internal company expense, which comes from the actions of an agent acting on behalf of a principal. Agency costs typically arise in the wake of core inefficiencies, dissatisfactions, and disruptions, such as conflicts of interest between shareholders and management. The payment of the agency cost is to the acting agent.

Understanding Agency Cost

Agency costs can occur when the interests of the executive management of a corporation conflict with its shareholders. Shareholders may want management to run the company in a certain manner, which increases shareholder value.

Conversely, the management may look to grow the company in other ways, which may conceivably run counter to the shareholders’ best interests. As a result, the shareholders would experience agency costs.

As early as 1932, American economists Gardiner Coit Means and Adolf Augustus Berle discussed corporate governance in terms of an “agent” and a “principal,” in applying these principals towards the development of large corporations, where the interests of the directors and managers differed from those of owners.

Principal-Agent Relationship

The opposing party dynamic is called the principal-agent relationship, which primarily refers to the relationships between shareholders and management personnel. In this scenario, the shareholders are principals, and the management operatives act as agents.

However, the principal-agent relationship may also refer to other pairs of connected parties with similar power characteristics. For example, the relationship between politicians (the agents), and the voters (the principals) can result in agency costs. If the politicians promise to take certain legislative actions while running for election and once elected, don’t fulfill those promises, the voters experience agency costs. In an extension of the principal-agent dynamic known as the “multiple principal problems” describes a scenario where a person acts on behalf of a group of other individuals.

A Closer Look at Agency Costs

Agency costs include any fees associated with managing the needs of conflicting parties, in the process of evaluating and resolving disputes. This cost is also known as agency risk. Agency costs are necessary expenses within any organization where the principals do not yield complete autonomous power.

Due to their failure to operate in a way that benefits the agents working underneath them, it can ultimately negatively impact their profitability. These costs also refer to economic incentives such as performance bonuses, stock options, and other carrots, which would stimulate agents to execute their duties properly. The agent’s purpose is to help a company thrive, thereby aligning the interests of all stakeholders.

Dissatisfied Shareholders

Shareholders who disagree with the direction management takes, may be less inclined to hold on to the company’s stock over the long term. Also, if a specific action triggers enough shareholders to sell their shares, a mass sell-off could happen, resulting in a decline in the stock price. As a result, companies have a financial interest in benefitting shareholders and improving the company’s financial position, as failing to do so could result in stock prices dropping.

Additionally, a significant purge of shares could potentially spook potential new investors from taking positions, thus causing a chain reaction, which could depress stock prices even further.

In cases where the shareholders become particularly distressed with the actions of a company’s top brass, an attempt to elect different members to the board of directors may occur. The ouster of the existing management can happen if shareholders vote to appoint new members to the board. Not only can this jarring action result in significant financial costs, but it can also result in the expenditure of time and mental resources.

Such upheavals also cause unpleasant and exorbitant red-tape problems, inherent in top-chain recalibration of power.

Real-World Example of Agency Costs

Some of the most notorious examples of agency risks come during financial scandals, such as the Enron debacle in 2001. As reported in this article on SmallBusiness.chron.com, the company’s board of directors and senior officers sold off their stock shares at higher prices, due to fraudulent accounting information, which artificially inflated the stock’s value. As a result, shareholders lost significant money, when Enron share price consequently nosedived.

Broken down to its simplest terms, according to the Journal of Accountancy, the Enron debacle happened because of “individual and collective greed born in an atmosphere of market euphoria and corporate arrogance.”