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Adjusting Entries

Adjusting entries ensure your financial statements accurately reflect your business's financial position at period-end. They record economic events that haven't been captured through regular transactions.

Why Adjusting Entries?​

To match revenues with related expenses in the correct period (matching principle) and accurately report assets, liabilities, revenues, and expenses.

Types of Adjusting Entries​

1. Accrued Revenues​

Revenue earned but not yet recorded or received.

Example: Completed $5,000 project, invoice sent in next month

Debit: Accounts Receivable      $5,000
Credit: Service Revenue                 $5,000

2. Accrued Expenses​

Expenses incurred but not yet recorded or paid.

Example: Employees worked last week of month, payroll paid next month

Debit: Wage Expense             $2,000
Credit: Wages Payable                   $2,000

3. Deferred Revenues​

Cash received before revenue is earned.

Example: Received $12,000 for annual service, one month complete

Debit: Unearned Revenue         $1,000
Credit: Service Revenue                 $1,000

4. Deferred Expenses (Prepaid)​

Cash paid before expense is incurred.

Example: Paid $1,200 annual insurance, one month expired

Debit: Insurance Expense          $100
Credit: Prepaid Insurance               $100

5. Depreciation​

Allocation of asset cost over useful life.

Example: Monthly depreciation on $60,000 vehicle (5-year life)

Debit: Depreciation Expense     $1,000
Credit: Accumulated Depreciation        $1,000

When to Make Adjusting Entries​

  • End of each accounting period (month, quarter, year)
  • Before financial statements are prepared
  • After all regular transactions recorded

Next Steps​

Learn about accruals and deferrals in more detail.