Adjusting Entry: Definition and Examples

What Is an Adjusting Entry?

An adjusting entry is a journal entry recorded near the end of an accounting period to update account balances before financial statements are finalized. It recognizes activity that belongs in the period but was not fully captured by routine transaction entry.

Adjusting entries help place revenue and expenses in the appropriate period and report assets and liabilities at supportable amounts. They are especially important in accrual-basis accounting, although cash-basis books may also use year-end adjustments for depreciation, inventory, loans, payroll liabilities, and tax-return preparation.

Common types of adjusting entries

Adjusting entries often fall into these groups:

• Accrued expenses: expenses incurred but not yet paid or entered, such as December utilities billed in January.
• Accrued revenue: revenue earned but not yet invoiced or collected.
• Deferred expenses: amounts initially recorded as assets and recognized as expense over time, such as prepaid insurance.
• Deferred revenue: amounts received before the business earns them and later recognized as revenue.
• Depreciation and amortization: systematic recognition of an asset's cost over applicable periods.
• Estimates: entries based on a reasonable calculation when the final amount is not yet known.
• Reclassifications: transfers between accounts when the original balance is in the wrong presentation category.

An error correction may also use a journal entry, but not every correction is an adjusting entry in the strict accounting-cycle sense. The entry description should explain whether it records a period-end accrual, estimate, reclassification, or correction.

Example of an accrued expense

Coastal Design LLC receives a $900 utility bill in January for electricity used in December. Under accrual accounting, the December adjustment is:

The entry increases December expense and records the liability owed at December 31. When the bill is paid, the business debits Utilities Payable and credits Cash. It should not record Utilities Expense a second time.

Example of accrued revenue

The company completes $2,500 of client work in December but will invoice in January:

This entry recognizes December revenue and a receivable. When the invoice is issued or paid, the workflow should clear the receivable without duplicating revenue.

Adjusting entry versus routine journal entry

A routine entry records an event when it occurs: issuing an invoice, paying a bill, receiving cash, or purchasing equipment. An adjusting entry updates the books at period-end because the ordinary workflow has not yet produced the proper ending balance.

Adjusting entries should be supported by a schedule, calculation, agreement, invoice, or other evidence. A vague entry to "fix profit" or make cash match the bank is not a valid adjustment. Differences should first be investigated through reconciliation and source-document review.

Adjusting entry versus closing entry

An adjusting entry is recorded before adjusted financial statements are finalized. A closing entry comes later and transfers or resets temporary revenue, expense, and distribution accounts for the next reporting period.

Adjusting entries can affect assets, liabilities, equity, revenue, and expenses. Closing entries primarily address temporary accounts and the related equity transfer. Confusing the two can cause income to disappear, duplicate, or appear in the wrong period.

Reversing entries

Some accruals are reversed on the first day of the next period to simplify routine processing. For example, the $900 utility accrual may be reversed January 1 so the January bill-entry workflow records the expense normally without leaving a duplicate liability.

Not every adjustment should reverse. Depreciation, permanent reclassifications, and corrections ordinarily remain. Each reversing entry should be linked to the original adjustment and tested after the actual transaction posts.

Book basis and tax basis

Financial-statement adjustments and tax-return adjustments do not always match. Book depreciation may differ from federal tax depreciation, and California may not conform to a federal depreciation deduction. Meals, owner transactions, nondeductible penalties, and other items can also require tax workpaper adjustments without changing the original bookkeeping category.

Avoid overwriting sound book records simply to make them equal a tax return. Maintain a reconciliation showing book income, tax adjustments, and federal–California differences when needed.

Common mistakes

• Posting an adjustment without support or an explanation.
• Recording only one side of the entry.
• Duplicating revenue or expense when the actual invoice later posts.
• Reversing an entry that should remain.
• Failing to reverse an accrual that the routine workflow will otherwise duplicate.
• Posting directly to bank balances instead of reconciling the underlying difference.
• Treating loan principal as interest or expense.
• Expensing a fixed asset through a year-end adjustment without review.
• Changing a closed prior period without approval and documentation.
• Forcing book balances to equal tax balances.

Frequently asked questions

Related terms

• Journal Entry
• Trial Balance
• Closing Entry
• Month-End Close
• Depreciation

Official sources

• IRS — Publication 583, Starting a Business and Keeping Records
• IRS — Topic No. 305, Recordkeeping
• IRS — Publication 538, Accounting Periods and Methods
• California FTB — Keeping your tax records

The definitions and examples on this page are for informational purposes only and do not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.