Adjusting Entry
Journal entries made at period-end to properly allocate revenue and expenses.
Definition
Adjusting entries are journal entries made at the end of an accounting period to update account balances for items not yet recorded. Common adjusting entries include: accruing expenses or revenue, deferring prepaid expenses, recording depreciation, and adjusting inventory.
These entries ensure financial statements comply with accrual accounting by matching revenue and expenses to the correct period. Without adjusting entries, financial statements would be incomplete and inaccurate.
Why It Matters
Adjusting entries are critical for accurate financial reporting. Missing adjustments can significantly misstate revenue, expenses, assets, and liabilities. Auditors scrutinize adjusting entries because they're subjective and prone to manipulation.
Common adjustments: accruing unbilled revenue (work completed but not yet invoiced), deferring prepaid expenses (insurance paid upfront), and recording depreciation (spreading asset costs over time).
Examples
- 1
Accrue December wages paid in January: Debit Wages Expense $10,000, Credit Wages Payable $10,000.
- 2
Defer prepaid insurance: paid $12,000 in January for annual policy, adjust monthly: Debit Insurance Expense $1,000, Credit Prepaid Insurance $1,000.
- 3
Record monthly depreciation on equipment: Debit Depreciation Expense $500, Credit Accumulated Depreciation $500.
Related Terms
Quick Navigation
Ready to put this into practice?
InvoiceLaunch automates invoicing with built-in payment terms, late fees, and more.
Get Started