Adjusting Journal Entry Definition: Purpose, Types, and Example

09 Jun Adjusting Journal Entry Definition: Purpose, Types, and Example


In a periodic inventory system, an adjusting entry is used to determine the cost of goods sold expense. This entry is not necessary for a company using perpetual inventory. A third classification of adjusting entry occurs where the exact amount of an expense cannot easily be determined. The depreciation of fixed assets, for example, is an expense which has to be estimated.

There is one more type of journal entry that doesn’t fit a tidy classification. For instance, if you find an error or some other material misstatement, you may use an adjusting entry to correct it. You’ll make adjusting journal entries from your client’s QuickBooks Online company file. Describe the reason that accrued expenses often require adjusting entries but not in every situation. If you have employees, chances are you owe them a certain amount of wages at the end of an accounting period.

Then, an adjusting entry to recognize the revenue is used as necessary. Depreciation expenses, including depreciation expense and accumulated depreciation, need to be posted to properly expense the useful life of a fixed asset. Depreciation is a fixed cost and does not negatively affect cash flow, but the balance sheet would show accumulated depreciation as a contra account under fixed assets.

If we statement of retained earnings cash, then both assets and expenses will increase by $500. The list goes on for the types of adjusting entries that companies would record, or you could see on the CPA exam or would need to record for a real company. It is extremely important to focus on the big picture and not try and memorize the examples below. You will need to use your own intuition to evaluate a business event and determine what the proper adjusting journal entry would be. As shown in the preceding list, adjusting entries are most commonly of three types.

His firm does a great deal of business consulting, with some consulting jobs taking months. If you earned revenue in the month that has not been accounted for yet, your financial statement revenue totals will be artificially low. For instance, if Laura provided services on January 31 to three clients, it’s likely that those clients will not be billed for those services until February. If adjusting entries are not made, those statements, such as your balance sheet, profit and loss statement, and cash flow statement will not be accurate.

Accrued Expenses

This is posted to the Depreciation Expense–Equipment T-account on the debit side . Accumulated Depreciation–Equipment has a credit balance of $75. This is posted to the Accumulated Depreciation–Equipment T-account on the credit side .

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  • This is why you need to make these adjustments to make them more accurate.
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  • We will not get to the adjusting entries and have cash paid or received which has not already been recorded.

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Step 3: Recording deferred revenue

At the end of your accounting period, you need to make an adjusting entry in your general journal to bring your accounts receivable balance up-to-date. Note that the ending balance in the asset Prepaid Insurance is now $600—the correct amount of insurance that has been paid in advance. The income statement account Insurance Expense has been increased by the $900 adjusting entry. It is assumed that the decrease in the amount prepaid was the amount being used or expiring during the current accounting period.

Accrued revenue is revenue that has been recognized by the business, but the customer has not yet been billed. This type of revenue is common in service-related businesses, as services can be performed several months before a customer is invoiced. Revenue must be accrued, otherwise revenue totals would be understated, especially compared to expenses for the period. For example, if you place an online order in September and that item does not arrive until October, the company you ordered from would record the cost of that item as unearned revenue. The company would make adjusting entry for September debiting unearned revenue and crediting revenue. Adjusting entries are made at the end of an accounting period after a trial balance is prepared to adjust the revenues and expenses for the period in which they occurred.

  • It doesn’t make any sense to collect or pay cash to ourselves when doing this internal entry.
  • This is posted to the Depreciation Expense–Equipment T-account on the debit side .
  • They may also be detected by doing variance analysis of account balances to detect any unusual balance fluctuations.
  • If accountants find themselves in a situation where the cash account must be adjusted, the necessary adjustment to cash will be acorrecting entryand not an adjusting entry.
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Accrual accounting instead allows for a lag between payment and product (e.g., with purchases made on credit). As an example, assume a construction company begins construction in one period but does not invoice the customer until the work is complete in six months. The construction company will need to do an adjusting journal entry at the end of each of the months to recognize revenue for 1/6 of the amount that will be invoiced at the six-month point. At the end of an accounting period—be it the end of a pay period, the end of your company’s fiscal year, or December 31—you would prepare the trial balance and then make the adjusted entries. You would then post these adjusted entries to your company’s General Ledger Accounts, and use the differences to create updated company financial systems.

10 Adjusting Entry – Examples

But based on the same logic Where we found our monthly expense of $1,000 to 12,000 total divided by the 12 months gave us 1000 a month and it’s been four months, right September October November December. From an accrual basis of accounting, we should have 4000 in rent expense, but right now our rent expenses sitting at 12,000. So how do we bring that rent expense down from 12,000 down to 4000. So if you think about it, I’m gonna do it right down here are rent expense t account? Remember we’ve got our T accounts and our rent expense is sitting at $12,000 right here.

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Accrued revenues are revenues that have been recognized , but their cash payment have not yet been recorded or received. When the revenue is recognized, it is recorded as a receivable. More than 4,000 companies of all sizes, across all industries, trust BlackLine to help them modernize their financial close, accounts receivable, and intercompany accounting processes. Maximize working capital with the only unified platform for collecting cash, providing credit, and understanding cash flow. Transform your accounts receivable processes with intelligent AR automation that delivers value across your business. Accrued InterestAccrued Interest is the unsettled interest amount which is either earned by the company or which is payable by the company within the same accounting period.


Since adjusting entries so frequently involve accruals and deferrals, it is customary to set up these entries as reversing entries. This means that the computer system automatically creates an exactly opposite journal entry at the beginning of the next accounting period. By doing so, the effect of an adjusting entry is eliminated when viewed over two accounting periods. These adjustments are made to more closely align the reported results and financial position of a business with the requirements of an accounting framework, such as GAAP or IFRS. This generally involves the matching of revenues to expenses under the matching principle, and so impacts reported revenue and expense levels. In essence, the intent is to use adjusting entries to produce more accurate financial statements.

Entry at the Time of Purchasing Supplies

If Laura does not accrue the revenues earned on January 31, she will not be abiding by the revenue recognition principle, which states that revenue must be recognized when it is earned. Advanced features include the automatic creation of journal entries through cloning of recurring journal entries or import of journal and journal lines from report writers or spreadsheets. It also provides integrated storage of supporting documentation, links to policies and procedures, and automatic posting and status tracking for real-time updates.

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We’ll show you how to rectify everything from to depreciation to keep your books organized. One might find it necessary to “back in” to the calculation of supplies used. Assume $200 of supplies in a storage room are physically counted at the end of the period. Since the account has a $900 balance from the December 8 entry, one “backs in” to the $700 adjustment on December 31. In other words, since $900 of supplies were purchased, but only $200 were left over, then $700 must have been used. Following our year-end example of Paul’s Guitar Shop, Inc., we can see that hisunadjusted trial balanceneeds to be adjusted for the following events.

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Prepaid InsurancePrepaid Insurance is the unexpired amount of insurance premium paid by the company in an accounting period. This portion of unexpired insurance is an asset and will be shown in the balance sheet of the company. Next Accounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. Estimates are adjusting entries that record non-cash items, such as depreciation expense, allowance for doubtful accounts, or the inventory obsolescence reserve. Companies that use cash accounting do not need to make adjusting journal entries.

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