Quick answer
Adjusting entries are period-end journal entries that update account balances for economic activity, allocations, or estimates not fully captured by routine recording. They may recognize accruals, update deferrals, or record allocations and estimates; they are not automatically corrections of mistakes.
The unadjusted trial balance is a checkpoint, not the finished reporting record. At period end, the business checks whether recorded balances reflect what has been earned, used, owed, or still available as at the reporting date. Identified adjustments are journalized and posted before the adjusted trial balance is prepared.
An accrual records revenue earned or an expense incurred before the related routine billing, collection, or payment entry. A deferral updates an amount left from an earlier cash receipt or payment as the business provides the service or uses the asset.
Purpose of adjusting entries
Routine entries cannot always capture activity by the reporting date. Invoices may not have arrived, billing may occur later, a prepaid asset may have been partly used, or an estimate may need updating. Without the adjustment, the period could omit revenue or expense and leave the related asset or liability overstated or understated. Adjustments align the records with the economic activity that belongs to the period before the statements are prepared.
Adjusting entries in the accounting cycle
- Start with the ledger and unadjusted trial balance.
- Gather period-end evidence such as counts, contracts, schedules, and calculations.
- Identify which accounts are not up to date and determine the amount supported by the evidence.
- Prepare and post a balanced adjusting entry.
- Prepare the adjusted trial balance used for financial statements.
Period-end timing adjustments ordinarily do not use Cash. A cash receipt or payment is recorded when it happens; the adjustment recognizes or allocates the related non-cash balance. A correction can involve Cash, but that is a different reason for an entry.
Common adjusting-entry patterns
Two questions organize the most common adjustments: did cash or the routine entry happen before recognition, or will it happen afterward? Then identify whether the missing effect concerns revenue, an expense, or an allocation or estimate.
Scroll horizontally to see all columns.
| Pattern | What period-end evidence shows | Typical debit | Typical credit |
|---|---|---|---|
| Prepaid expense used | Cash was paid earlier; part of the recorded asset has now been consumed. | Expense | Prepaid asset |
| Unearned revenue earned | Cash was received earlier; part of the promised service has now been provided. | Unearned Revenue | Revenue |
| Accrued revenue | Revenue was earned before routine billing or collection. | Receivable | Revenue |
| Accrued expense | An expense was incurred before routine billing or payment. | Expense | Payable |
| Allocation or estimate | A supported schedule or estimate shows the period’s amount. | Expense or loss | Related asset offset, liability, or allowance |
The account names vary with the facts. Identify what has now been earned, used, owed, or estimated, then update the balance-sheet account that carried the timing difference.
For a balance that is estimated at period end, distinguish the required ending balance from the adjustment. Compare the supported target with the amount already in the ledger, then record only the difference. A receivables allowance uses this approach; its detailed collection analysis belongs to Accounts Receivable.
Allowance adjustment pattern
A separately prepared collection estimate requires a $320 closing allowance. With an $80 existing credit balance, the adjustment is $320 − $80 = $240: debit Credit Loss Expense and credit Allowance for Credit Losses. Net receivables and profit decrease by $240; cash does not change.
Post Maple Tech’s three March adjustments
At March 31, $900 of supplies remains. Maple has completed all required performance for $1,000 of services and has an unconditional right to the amount. Its stated equipment policy produces one month of depreciation. These facts illustrate a used asset, accrued revenue, and an allocation.
Supplies used: $2,400 recorded − $900 counted on hand = $1,500 March expense. The adjustment increases Supplies Expense and reduces the Supplies asset to the amount still on hand.
Scroll horizontally to see all columns.
| Account | Debit | Credit |
|---|---|---|
| Supplies Expense | 1,500 | |
| Supplies | 1,500 |
All required performance is complete and issuing the invoice is only an administrative step. Maple therefore records its $1,000 unconditional right as Accounts Receivable and recognizes the related Service Revenue.
Scroll horizontally to see all columns.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | 1,000 | |
| Service Revenue | 1,000 |
Monthly depreciation is ($12,000 cost − $0 residual value) ÷ 60 months = $200. The adjustment records March’s expense and adds the same amount to Accumulated Depreciation.
Scroll horizontally to see all columns.
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | 200 | |
| Accumulated Depreciation — Equipment | 200 |
The adjusted trial balance
Scroll horizontally to see all columns.
| Account | Debit | Credit |
|---|---|---|
| Cash | 42,500 | |
| Accounts Receivable | 1,000 | |
| Supplies | 900 | |
| Equipment | 12,000 | |
| Accumulated Depreciation — Equipment | 200 | |
| Accounts Payable | 2,400 | |
| Common Shares | 50,000 | |
| Service Revenue | 7,000 | |
| Rent Expense | 1,500 | |
| Supplies Expense | 1,500 | |
| Depreciation Expense | 200 | |
| Total | 59,600 | 59,600 |
The columns now total $59,600. The $1,000 accrued service and $200 depreciation entries add $1,200 to each column. The $1,500 supplies adjustment moves an amount between two debit-balance accounts, so it does not change either total.
These posted entries are now reflected in the adjusted trial balance: Supplies is $900, Accounts Receivable is $1,000, and Accumulated Depreciation is $200. Those updated ledger balances—not the unadjusted amounts—are the balances carried into the financial statements.
Financial-statement effect
Scroll horizontally to see all columns.
| Statement | Account | Effect | Timing |
|---|---|---|---|
| Income statement | Revenue and expenses | March profit becomes $3,800 | For March |
| Balance sheet | Receivable, supplies, accumulated depreciation | Period-end carrying amounts are updated | At March 31 |
| Cash flow statement | Cash | No adjustment changes the $42,500 cash balance | Cash changes when it is received or paid |
- Income statement
- AccountRevenue and expenses
- EffectMarch profit becomes $3,800
- TimingFor March
- Balance sheet
- AccountReceivable, supplies, accumulated depreciation
- EffectPeriod-end carrying amounts are updated
- TimingAt March 31
- Cash flow statement
- AccountCash
- EffectNo adjustment changes the $42,500 cash balance
- TimingCash changes when it is received or paid
Common errors
- Waiting for cash before recognizing activity that belongs to the period.
- Adjusting the full recorded balance instead of only the amount earned, used, or still outstanding.
- Crediting Equipment directly for depreciation instead of using the related accumulated-depreciation contra-asset.
- Preparing statements from the unadjusted trial balance after adjustments were identified.