Definition
An adjusting entry is a journal entry recorded at the end of a period to bring account balances up to date before the statements are prepared. Typical adjustments record accrued expenses and revenue, release prepaid amounts, recognise depreciation and update provisions, so that income and expenses fall in the period they belong to.
How it works
Adjustments exist because cash and documents rarely arrive in the period the economic event happens. December's electricity is billed in January; an annual insurance premium paid in March covers twelve months. Without adjustments, the income statement would follow invoices and payments rather than the accrual basis.
There are four common families: accruals (expense or revenue earned but not yet invoiced), deferrals (cash paid or received in advance, released over time), estimates (depreciation, allowance for doubtful debts, inventory write-downs) and reclassifications. Most are recurring, which makes them good candidates for a month-end close checklist.
A common mistake is booking an accrual and then also booking the real invoice next month, which doubles the expense. Either reverse the accrual on the first day of the new period or clear it against the invoice.
Example: accruing December wages paid in January
Staff earned 8,000 in the last week of December, paid on 5 January. At 31 December the expense and a liability are recorded; in January the payment clears the liability.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 31 Dec | Wages expense | 8,000 | |
| 31 Dec | Accrued wages (liability) | 8,000 | |
| 5 Jan | Accrued wages (liability) | 8,000 | |
| 5 Jan | Bank | 8,000 |