What are Adjusting Journal Entries?
Adjusting entries are journal entries made at the end of an accounting period to update account balances under accrual accounting, ensuring revenues and expenses are recorded in the period they're actually earned or incurred — not just when cash changes hands.
Adjusting journal entries are period-end entries that recognize accrued or deferred revenues and expenses so financial statements follow the accrual basis and the matching principle.
- 1↓Accrued RevenueEarned but not yet billed/received — debit a receivable, credit revenue.
- 2↓Accrued ExpenseIncurred but not yet paid — debit expense, credit a payable.
- 3↓Prepaid Expense (Deferral)Paid in advance — release a portion from asset to expense each period.
- 4Unearned Revenue (Deferral)Cash received in advance — release a portion from liability to revenue as earned.
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Step-by-step worked examples
On Jan 1, a company pays $12,000 for a 12-month insurance policy, recorded as Prepaid Insurance. What's the adjusting entry at the end of January?
Monthly expense = 12,000 / 12 = 1,000 Debit Insurance Expense 1,000 Credit Prepaid Insurance 1,000
Employees earned $3,500 in wages during the last week of December, to be paid in January. What adjusting entry is needed on Dec 31?
Wages are incurred but unpaid → accrued expense Debit Wages Expense 3,500 Credit Wages Payable 3,500
A company received $6,000 on Nov 1 for a 6-month service contract, recorded as Unearned Revenue. What's the adjusting entry at Dec 31 (2 months elapsed)?
Monthly revenue earned = 6,000 / 6 = 1,000 2 months elapsed → 1,000 × 2 = 2,000 earned Debit Unearned Revenue 2,000 Credit Service Revenue 2,000
Flashcards
Quick quiz
Q1.Which of these is an example of an accrued expense?
Q2.A company pays $6,000 for a 6-month insurance policy. What is the adjusting entry after 1 month?
Q3.What principle do adjusting entries enforce?
Q4.Unearned revenue is initially recorded as…
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Common mistakes
Recording adjusting entries with a Cash debit or credit. — Correct: Adjusting entries never touch Cash — they reallocate between a revenue/expense and a related balance sheet account.
Forgetting to make adjusting entries before preparing financial statements. — Correct: They must be posted at period end, before the adjusted trial balance and statements are prepared.
Confusing accrued and deferred items. — Correct: Accruals = recognize before cash moves; deferrals = cash already moved, recognize gradually over time.
Expensing the entire prepaid amount at once. — Correct: Only the portion of the period that has passed is expensed; the rest stays as a prepaid asset.
FAQ
What is the formula for adjusting entries?
There's no single formula, but deferrals often use Adjustment = Total amount ÷ Number of periods to allocate evenly.
What are examples of adjusting entries?
Recording accrued wages, accrued interest, expired prepaid insurance, and earned portions of unearned revenue.
How do you calculate an adjusting entry for prepaid expenses?
Divide the total prepaid amount by the number of periods it covers, then expense one period's share.
Why do adjusting entries matter for accounting exams?
They test whether you understand accrual accounting and the matching principle — a core concept in every intro accounting course.