Adjusting Entries in Accounting

Adjusting Entries

What Are Adjusting Entries?

Adjusting entries are journal entries made at the end of an accounting period to update account balances before financial statements are prepared. They ensure that revenues and expenses are recorded in the period in which they are actually earned or incurred — following the accrual basis of accounting.

Why Are Adjusting Entries Important?

  • Reflect revenue when earned, not when received
  • Match expenses with related revenues
  • Ensure accurate financial reporting

Types of Adjusting Entries (Click to Expand)

1. Accrued Revenues

Revenue earned but not yet received or recorded.

  • Example: Client received service on Dec 29, billed in January.
  • Entry:
  • Debit: Accounts Receivable
  • Credit: Service Revenue
2. Accrued Expenses

Expenses incurred but not yet paid or recorded.

  • Example: Salaries for December paid in January.
  • Entry:
  • Debit: Salaries Expense Credit: Salaries Payable
3. Prepaid Expenses (Deferred)

Cash paid in advance for future expenses.

  • Example: 12-month rent paid in January.
  • Monthly Adjustment:
  • Debit: Rent Expense Credit: Prepaid Rent
4. Unearned Revenue (Deferred)

Cash received before services are provided.

  • Example: Payment received in December for January work.
  • Entry: 
    Debit: Unearned Revenue
Credit: Service Revenue
5. Depreciation

Spreading the cost of fixed assets over time.

  • Example: Machine costing $12,000 for 3 years.
  • Monthly Entry: 
    Debit: Depreciation Expense
Credit: Accumulated Depreciation
6. Bad Debt (Allowance Method)

Estimated uncollectible customer accounts.

  • Entry: 
    Debit: Bad Debt Expense
Credit: Allowance for Doubtful Accounts
7. Inventory Adjustments

Closing inventory and cost of goods sold updates (periodic system).

  • Entry: 
    Debit: COGS
Credit: Inventory
8. Income Tax Payable

Accrued taxes to be paid to the government.

  • Entry: 
    Debit: Income Tax Expense
Credit: Income Tax Payable

Conclusion

Adjusting entries are essential for accurate accounting and honest financial statements. Mastering them ensures you understand how timing, cash flow, and business activity are all connected. Stay consistent, practice journal entries, and you'll become confident in this core accounting concept!