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I wanna talk just for a second about adjusting entries. I think this is one of those things that gets thrown around a bunch, and it's never really explained. They just say, "Well, make the adjusting entry," or, "Do the adjusting entry," but it's never explained what the heck is an adjusting entry. An adjusting entry is made because something changes.
We make adjusting entries because something has changed. We have an original entry, and then something changed here in the middle, so we need to make an adjusting entry. And the way that this typically works itself out in most of the problems you're gonna be looking at is time passes.
So you make an original entry, and then time passes, and as that time passes, you're using something up, you're earning something, something is changing. And so whenever the period ends, you have to make your adjusting entry to recognize what has actually changed. Let me give you an example. Let's say on July 1, you pay rent for the next year. So you're paying for July 1 all the way back around to July 1. So that's a prepaid rent, right? Because you're paying ahead of time. So if you pay $12,000 ahead of time, your prepaid rent goes up and your cash goes down. So what happens at the end of the year?
Because you have to close your books, which we'll talk about. Let's just say your teacher says, "Make the adjusting entry for December 31." And you say, "I have no idea what that means." Well, when you make an adjusting entry, it's because something changed or because time passed. So between July 1 and December 31, six months have passed, and this $12,000 is no longer prepaid rent, right? Because you paid it on 7/1, and you paid all the way out till 7/1 of the next year, but here we are on 12/31. So if we're standing at 12/31, we're looking back on six months, and we're looking forward to six months, right?
So we're looking forward, and this part is still prepaid. But as we're looking back, this is rent that we've used up, and so this becomes an expense because we've used it. We paid. They let us stay in the building. Now that time has passed, and it's gone. So all this becomes an expense.
So when your teacher says, "Make the adjusting entry," you think, "Okay, well, what has changed between the time I made the original entry and when she's asking me to make the adjusting entry?" Time has passed. And so you need to take your prepaid rent and reduce it by whatever amount. Here it happens to be six months, $6,000, and that $6,000 has been used up, so it becomes a rent expense.
So that's all that adjusting entries mean. Basically, you did a thing, and then the period ended, and you need to adjust the original thing that you did for the passage of time. We're gonna have a couple of videos of examples, but I just wanted to start by saying, "What in the world is an adjusting entry?" And it's the entry that you make to adjust the original entry for either the passage of time or something else changed, like you earned the revenue, you did the work, that sorta thing. And that's what the adjusting entry is good for. It's good for updating the original entry.