Adjusting entries are journal entries made at the end of an accounting period to record revenues that have been earned and expenses that have been incurred but do not yet appear in the accounts. They exist because cash often moves earlier or later than the activity it pays for, and accrual accounting requires the statements to report the activity, not the cash. Every adjusting entry updates one income statement account and one balance sheet account, and cash is never one of them.
Here is the timing problem they solve. Suppose your company pays $1,800 on January 1 for twelve months of insurance. The bookkeeper records the payment once, in January. But the company uses up that coverage a little each month, and by March 31 three months of it — $450 — is gone. Without an adjustment, the March statements would show an asset the company no longer fully has and would hide an expense it genuinely incurred. The adjusting entry moves $450 out of the asset Prepaid Insurance and into Insurance Expense, so each statement tells the truth about its own period.
That is the whole job. Adjusting entries do not record new transactions with outsiders. They catch the accounts up to what has already happened inside the period.
Textbooks group adjusting entries into five types. Each one answers the same question: what happened this period that the accounts have not caught up with yet?
Revenue you have earned but not yet billed or collected. A tutoring firm finishes $1,150 of sessions in the last week of June and sends the invoice in July. The work happened in June, so June gets the revenue: debit Accounts Receivable, credit Service Revenue. The cash arrives later and is recorded later, as a separate transaction.
Costs you have incurred but not yet paid. Salaries earned by employees before payday, interest that has built up on a loan, a bill for power already used. The adjusting entry debits the expense and credits a payable. The first worked example below walks through accrued salaries line by line.
Cash you collected before doing the work. When a client pays $2,400 in advance for six months of service, you cannot call it revenue yet. You owe the work, so the amount sits in a liability account called Unearned Revenue. After two months you have earned $800 of it, and the adjusting entry debits Unearned Revenue (the debt shrinks) and credits Service Revenue (the earning is recognized).
Cash you paid before receiving the benefit — insurance, rent, supplies. The payment first sits in an asset account. As the benefit is used up, an adjusting entry moves the used portion to expense. For the insurance policy above: debit Insurance Expense $450, credit Prepaid Insurance $450.
A long-lived version of a prepaid expense. You paid for equipment up front and will use it for years, so each period an adjusting entry moves a slice of the cost to Depreciation Expense. The credit goes to Accumulated Depreciation, a contra-asset account, rather than to the equipment account itself. The second worked example shows why.
A company's employees earned $3,240 during the final four days of June. Payday is July 3, so no payment has been recorded and nothing about those four days is in the books yet. June's income statement is about to be prepared, and it is missing a real cost of June's operations. The adjusting entry on June 30 fixes that.
| Account | Debit | Credit |
|---|---|---|
| Salaries Expense | $3,240 | |
| Salaries Payable | $3,240 |
Read the entry account by account. Salaries Expense is debited because June received four days of labor, so June carries the cost — that is the matching principle at work. Salaries Payable is credited because the company now owes its employees $3,240, and a debt belongs on the balance sheet as a liability.
Notice what the entry does not touch: cash. When payday arrives on July 3, a separate entry debits Salaries Payable and credits Cash for $3,240. That July entry settles the debt, and it is an ordinary transaction, not an adjusting entry. The adjustment already did its job by putting the expense in June, where it belongs.
A delivery van cost $24,600 and is expected to last five years, after which it can be sold for about $2,100. Straight-line depreciation spreads the rest of the cost evenly across those years: ($24,600 − $2,100) ÷ 5 = $4,500 per year, or $375 per month. Each month-end adjusting entry records one month's slice.
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | $375 | |
| Accumulated Depreciation — Vehicles | $375 |
The credit goes to Accumulated Depreciation instead of directly reducing the Vehicles account. That design lets the balance sheet show both the van's original cost and how much of it has been used up, so a reader can compute book value at a glance. After ten months of these entries, the van's book value is $24,600 − $3,750 = $20,850.
Putting cash in an adjusting entry. Cash never appears in one. If cash moved, that movement was recorded on the day it moved. Adjusting entries fix timing, not cash — each one pairs an income statement account with a balance sheet account, and neither of them is Cash. On an exam, an answer choice with Cash in it is not an adjusting entry.
Debiting the wrong side of a deferral. Students see Unearned Revenue and hesitate over which side to touch. Ask what is true now. If the work has been performed, revenue must go up, and revenue goes up with a credit — so the debit must fall on the account that was holding the money, Unearned Revenue. The same logic runs the prepaid side. The benefit was used, so the expense is debited, and the asset that was holding the cost is credited.
Mixing up adjusting and closing entries. Adjusting entries come first. They update the balances so the financial statements are accurate. Closing entries come after the statements, and they do a different job entirely: they empty the revenue and expense accounts into Retained Earnings so the next period starts from zero. Adjusting entries make the numbers right. Closing entries reset the scoreboard.
Every adjusting entry catches the accounts up to activity that cash timing has hidden: one income statement account, one balance sheet account, and never Cash.
Adjusting entries are journal entries made at the end of an accounting period to record revenues earned and expenses incurred that are not yet in the accounts. They align the financial statements with accrual accounting, so each period reports its own activity regardless of when cash moves.
It is called the adjusted trial balance. It lists every account with its updated balance and is the direct source for preparing the income statement and balance sheet. A trial balance prepared before adjustments is the unadjusted trial balance.
Without them, revenues and expenses would be reported in whatever period the cash happened to move, not the period the activity happened. Journalizing and posting the adjustments puts each revenue and expense in the correct period, which is what the revenue recognition and matching principles require.
Not from daily source documents like invoices. Adjustments come from analyzing the accounts at period end. Common sources include insurance policies and lease terms for prepaids, payroll records for accrued salaries, loan agreements for accrued interest, physical counts for supplies, and depreciation schedules for long-lived assets.
Check for Cash. Adjusting entries never touch the Cash account, so any entry that debits or credits Cash is a regular transaction, not an adjustment. Closing entries and ordinary daily transaction entries are also not adjusting entries.
Accruals record activity before cash moves: revenue earned before collection, or expenses incurred before payment. Deferrals record activity after cash has already moved: cash collected before it is earned, or paid before the benefit is used. All five types of adjusting entries fall into one of these two families, with depreciation behaving as a long-term deferral.
By the FinanceBrain Team · Last verified July 10, 2026 · How we produce and verify articles