A Simple Guide to Adjusting Entries | Generated by AI
How to Make Adjusting Entries: A Simple Step-by-Step Guide
Publication Date: June 2, 2025
Author: Not specified
This blog post provides a beginner-friendly guide to adjusting entries in accounting. Adjusting entries are journal entries made at the end of an accounting period to record revenues or expenses that have occurred but aren’t yet reflected in the books. They’re crucial under accrual accounting to match revenues with related expenses (matching principle) and ensure material items are accurately reported, aligning with standards like GAAP and IFRS. Without them, financial statements could mislead stakeholders by showing inaccurate profits, assets, or liabilities.
Why Adjusting Entries Matter
- They bridge the gap between accrual (recognize when earned/incurred) and cash-basis accounting (recognize only when cash moves).
- Impact: Update balance sheets (e.g., assets/liabilities like receivables or prepaids), income statements (e.g., revenues/expenses like depreciation), and cash flow statements (e.g., non-cash adjustments).
- Benefits: Accurate reporting, compliance, and better decision-making.
Types of Adjusting Entries
The post outlines five main types, with explanations and journal entry examples (assuming double-entry accounting where debits equal credits):
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Accrued Revenues (Earned but not yet recorded/billed):
Example: A $2,000 consulting project finishes on March 28 but is invoiced April 5.
Journal (March 31, 2025): Debit Accounts Receivable $2,000; Credit Revenue $2,000. -
Accrued Expenses (Incurred but not yet paid/recorded):
Example: $5,500 in wages for late June, paid July 5.
Journal (June 30, 2025): Debit Wage Expense $5,500; Credit Wages Payable $5,500. -
Deferred (Unearned) Revenues (Cash received in advance for future delivery): Treated as liabilities until earned.
Example: $6,000 received December 15 for Q1 services. Initial: Debit Cash $6,000; Credit Unearned Revenue $6,000. Monthly recognition (e.g., January): Debit Unearned Revenue $2,000; Credit Revenue $2,000. -
Prepaid Expenses (Paid in advance for future benefits): Treated as assets until used.
Example: $12,000 annual insurance paid November 1. Initial: Debit Prepaid Insurance $12,000; Credit Cash $12,000. Monthly: Debit Insurance Expense $1,000; Credit Prepaid Insurance $1,000. -
Depreciation/Amortization (Spreading asset costs over useful life): Depreciation for tangibles, amortization for intangibles.
Example: $60,000 equipment over 5 years (straight-line). Journal (Dec 31, 2025): Debit Depreciation Expense $12,000; Credit Accumulated Depreciation $12,000.
Other types include estimates like bad debts: e.g., 2% of $200,000 sales ($4,000) as Debit Bad Debt Expense; Credit Allowance for Doubtful Accounts.
Real-world examples span industries: a consulting firm accruing $8,500 March revenue, a retail store accruing $1,200 December utilities, or a SaaS company recognizing $24,000 annual subscriptions monthly.
Step-by-Step Process to Make Adjusting Entries
- Review Unadjusted Trial Balance: Get a snapshot of current account balances.
- Identify Needed Adjustments: Scan for unrecorded items, prepaids, depreciation, etc.
- Classify the Type: Based on timing (e.g., cash vs. earned).
- Prepare Journal Entries: Use double-entry; date to period-end.
- Post to Ledger: Manually or via software.
- Create Adjusted Trial Balance: Verify balances and check for errors.
- Generate Statements: Use adjusted data for income statement, balance sheet, etc.
Tips and Best Practices
- Schedule early and use checklists for recurring items.
- Add detailed descriptions for audits.
- Automate with accounting software to cut errors and time.
- Compare periods for anomalies; document everything for taxes.
- Segregate duties (prepare, review, approve).
- Focus on material items; review historical patterns.
- Leverage tech for consistency and trails.
Common Mistakes and Fixes
- Missing accruals: Use checklists and request early bills.
- Misclassifying deferred/prepaid: Remember unearned = liability, prepaid = asset.
- Forgetting depreciation: Set reminders.
- Overcomplicating: Keep entries simple and clear.
- Manual errors: Implement dual reviews.
- Inconsistent timing: Follow a formal closing schedule.
Conclusion
Adjusting entries don’t affect cash but refine financials for a true picture of operations. A structured approach minimizes errors, and tools can streamline as businesses scale. The FAQ recaps: Five types; period-end accrual alignments; rules like double-entry, detailed notes, and compliance.
How to Make Adjusting Entries: A Simple Step-by-Step Guide