What is Adjusting Entries?

Adjusting entries are made at month end or year end to correct timing. Day-to-day transactions record cash moving and bills arriving, but some items need adjusting so the financial statements are accurate for the period.

Common types

• Accruals: recording expenses incurred but not yet billed, such as wages earned by employees in the last days of the month, or revenue earned but not yet invoiced
• Deferrals: moving amounts paid or received in advance to the period they relate to, such as prepaid expenses and deferred revenue
• Depreciation: recording the period's share of fixed asset cost
• Estimates: such as an allowance for doubtful accounts or inventory adjustments after a count

Example

A business pays a 12-month insurance policy of $2,400 in January. Without adjustment, January shows a $2,400 expense and the other months show none. A monthly adjusting entry moves $200 from prepaid insurance to insurance expense, so each month bears its share.

Who needs them

Businesses reporting on the accrual basis rely on adjusting entries. Cash-basis businesses make fewer, but still record depreciation and corrections.

Documentation

Every adjusting entry should have a short explanation and supporting calculation, so it is clear later why it was made. Adjusting entries are part of our month-end close.

Related terms

• Deferred Revenue: Deferred revenue is money received for goods or services the business has not yet delivered, recorded as a liability.
• Prepaid Expenses: Prepaid expenses are payments made in advance for goods or services the business will receive in future periods.
• Depreciation: Depreciation spreads the cost of a long-lived business asset over the years it is used, rather than deducting it all at once.

Browse more definitions in the small business glossary.