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.
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