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Adjusting entries are journal entries posted at the end of an accounting period to record revenue that has been earned and expenses that have been incurred but not yet captured, so the books reflect accrual-basis reality before financial statements are prepared. Every adjusting entry touches one income statement account and one balance sheet account, and none of them ever touch cash. If your numbers were already recorded on the exact day money moved, you would not need them. Because real business does not work that way, adjusting entries are what turn a running cash log into statements a lender or an auditor will trust.
They exist because of two rules that sit under accrual accounting: the revenue recognition principle, which says record revenue when it is earned, and the matching principle, which says record expenses in the same period as the revenue they helped produce. Timing rarely lines up with cash. You use electricity in March and pay for it in April. You collect an annual retainer in January and earn it across twelve months. Adjusting entries fix that gap at period end.
What are the five types of adjusting entries?
There are five common types, and every adjusting entry you post falls into one of them. The pattern is easy once you see it: accruals record something that happened before the cash moves, deferrals unwind something where the cash already moved, and depreciation spreads a past purchase across the periods it serves.
| Type | What it records | Typical entry |
|---|---|---|
| Accrued expenses | Costs incurred, not yet billed or paid | Debit expense, credit accrued liability |
| Accrued revenues | Revenue earned, not yet invoiced | Debit receivable, credit revenue |
| Deferred (prepaid) expenses | Cash paid up front, expense not yet used | Debit expense, credit prepaid asset |
| Deferred (unearned) revenue | Cash collected up front, not yet earned | Debit unearned revenue, credit revenue |
| Depreciation | Part of a fixed asset used up this period | Debit depreciation expense, credit accumulated depreciation |
A worked example
Say your company borrows on a note and owes $600 of interest for the month, payable next quarter. No invoice has arrived and no cash has moved, but the cost belongs to this period. The adjusting entry debits interest expense $600 and credits interest payable $600. Your income statement now shows the March cost in March, and your balance sheet shows the liability you actually owe. When you pay the interest later, that payment clears the payable and does not hit expense again.
The same logic runs the other way for a prepaid. If you paid $12,000 for a year of insurance in January, January's entry put $12,000 into a prepaid asset. Each month you post an adjusting entry debiting insurance expense $1,000 and crediting prepaid insurance $1,000, so one twelfth of the cost lands in each month it covers. By December the prepaid is zero and the expense is fully recognized.
When do you post adjusting entries?
Adjusting entries are posted at the end of every accounting period, after all routine transactions are recorded but before the trial balance is finalized and statements are drawn up. For most teams that means monthly, as a fixed step in the month-end close checklist. Companies that only report quarterly or annually adjust then, but monthly adjustment keeps management numbers honest and stops a full year of accruals from landing in one painful December. The order is: record transactions, post adjusting entries, run the adjusted trial balance, produce the statements, then post closing entries.
Adjusting entries vs closing entries
They happen back to back at period end and get confused, but they do different jobs. Adjusting entries update account balances so the period is stated correctly under accrual rules. Closing entries come after the statements are done and zero out the temporary accounts, revenue, expenses and dividends, moving their balances into retained earnings so the next period starts clean. An adjusting entry changes what the period reports. A closing entry resets the counters for the next one. Every adjusting entry hits both an income statement and a balance sheet account; closing entries move income statement balances into equity.
Why adjusting entries matter for accounts payable
The accrued-expense entry is where accounts payable and the accounting close meet. At month-end you almost always have goods or services received where the vendor invoice has not arrived yet. Those belong in the period as an accrual, usually posted to accrued liabilities rather than the AP control account, then reversed when the real invoice comes in and gets entered normally. Getting this right depends on knowing what was received and what it should cost, which is why teams that capture invoice data cleanly, often by having software read the figures straight off each vendor invoice, close faster and accrue more accurately. Sloppy accruals show up later as duplicate expense or a payables balance that will not reconcile to the general ledger.
Do adjusting entries affect cash?
No. Adjusting entries never touch the cash account. That is the quickest way to check whether an entry is really an adjusting entry: if it debits or credits cash, it is a regular transaction, not an adjustment. Adjusting entries move value between a revenue or expense account and a related asset or liability, recording timing differences that have nothing to do with when cash physically moved. The cash effect was either already recorded when money changed hands or will be recorded when it does.
What are reversing entries?
Reversing entries are optional bookkeeping shortcuts posted on the first day of a new period that undo certain accruals from the prior period. Their purpose is to keep the new period simple. If you accrued $600 of interest at month-end, a reversing entry on day one of the next month cancels that accrual, so when the actual bill arrives you can record it as a normal expense without having to remember to offset the accrual. They are most useful for accrued expenses and accrued revenues, prevent the double-counting that trips up busy teams, and are never used for depreciation or for deferrals that unwind on their own schedule. If your accounting software handles accruals automatically, you may never post one by hand, but knowing what they do helps you read the ledger when they appear.
Handled well, adjusting entries are quiet plumbing. They make sure the electricity you burned, the insurance you consumed and the interest you owe all show up in the month they belong to, so the statements you hand to a bank, a board or the IRS describe the business as it actually ran. Build them into your close as a standing step, keep the supporting detail with each journal entry, and the year-end version stops being a scramble.
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