Adjusting Entry
An adjusting entry is a journal entry made at the end of an accounting period to update account balances before preparing financial statements. These entries ensure revenues and expenses are recorded in the correct period — even if cash hasn't moved yet. They're a core part of accrual basis accounti
Adjusting Entry Definition
An adjusting entry is a journal entry made at the end of an accounting period to update account balances before preparing financial statements. These entries ensure revenues and expenses are recorded in the correct period — even if cash hasn't moved yet. They're a core part of accrual basis accounting and the month-end close process.
Adjusting Entry in Practice — Example
You own a small bakery and prepaid $6,000 for six months of rent in January. Each month, you need an adjusting entry to move $1,000 from prepaid rent (asset) to rent expense. Without this entry, your balance sheet overstates your assets and your P&L understates your expenses. At month-end in February, you debit Rent Expense $1,000 and credit Prepaid Rent $1,000. Repeat monthly until the prepayment is fully expensed.
Why Adjusting Entry Matters for Your Books
Adjusting entries are what separate rough books from reliable financial statements. Without them, your P&L and balance sheet are snapshots of cash movement, not economic reality. They correct timing differences between when transactions occur and when cash flows.
There are four main types: accrued revenues (earned, not yet billed), accrued expenses (incurred, not yet paid), deferred revenues (collected, not yet earned), and prepaid expenses (paid, not yet used). Each type addresses a specific timing mismatch.
Month-end adjusting entries are often where DIY bookkeeping breaks down. Business owners handle day-to-day transactions fine but skip the period-end adjustments — resulting in inaccurate financials that cascade into bad decisions and tax surprises.
How Adjusting Entry Shows Up in QuickBooks
In QBO, create adjusting entries via New → Journal Entry. Check the "Is Adjusting Journal Entry" box so QBO flags it separately from regular entries. You'll find them under Reports → Journal (filtered by adjusting entries) or on the Audit Log. Common adjusting entries include depreciation, prepaid expense amortization, accrued wages, and deferred revenue recognition.
Common Mistakes
FAQ
Q: How often should I make adjusting entries? A: At minimum, monthly — at the end of each accounting period before running financial reports. Quarterly or annual adjustments are the bare minimum for tax purposes.
Q: Do I need adjusting entries on cash basis? A: Generally no. Cash basis records transactions when cash moves, so there's less need for period-end adjustments. However, some adjustments (like depreciation) may still apply.
Related Terms
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Related Terms
A balance sheet is a financial statement that shows what your business owns (assets), what it owes (liabilities), and what's left over for the owners (equity) at a specific point in time. It follows the fundamental equation: Assets = Liabilities + Equity. Unlike the P&L, which covers a period, the b
Operating expenses are the costs required to run a business's day-to-day operations, excluding the direct costs of producing goods or services (COGS). Operating expenses include rent, utilities, salaries, marketing, insurance, office supplies, and professional fees. These expenses appear on the inco
Direct costs are expenses that can be specifically traced to a particular product, service, project, or customer. They vary directly with production volume or activity level — more sales means proportionally more direct costs. Common direct costs include raw materials, direct labor, and subcontracto
An audit trail is a chronological record of every change made to your financial records — who did what, when, and why. It's the digital paper trail that proves your books are legit. Every transaction created, edited, or deleted gets logged, creating an unbreakable chain of accountability.
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