Bookkeeping Basics
Adjusting Entries
End-of-period journal entries that move revenues and expenses into the correct period before financials are issued.
Adjusting entries are the journal entries made at period-end to bring the books from 'as transactions happened' to 'as they should be reported.' They handle four things: accruing costs not yet recorded (accrued expenses), deferring revenue not yet earned (deferred revenue), expensing prepaid assets used up this period (prepaid expenses), and recording non-cash allocations like depreciation and bad debt.
Every adjusting entry touches at least one income statement account — that's the point. Without them, the close produces statements that reflect cash timing instead of economic reality. Most 'the numbers were wrong' discoveries trace back to an adjusting entry that was skipped: the unpaid invoice that never got accrued, the annual subscription that was expensed in full in month one, the depreciation run that nobody scheduled.
Example
Your $12,000 annual insurance policy was paid in full in January. Without an adjusting entry, January shows a $12,000 expense and every other month shows zero. The adjusting entry each month debits insurance expense $1,000 and credits prepaid insurance $1,000, spreading the cost across the twelve months it actually covers.
Common questions
When are adjusting entries made?
At the end of each reporting period, before the financial statements are prepared. They are part of the month-end close checklist, typically after all sub-ledgers (bank, AR, AP) are reconciled.
Do adjusting entries involve cash?
No. That's their defining feature — they reallocate amounts between balance sheet and income statement accounts without any cash moving. Cash transactions are recorded as they happen; adjusting entries fix timing.
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