Adjusting Entries: Examples and When to Use Them
Quick answer: Adjusting entries are journal entries recorded at end of an accounting period to update account balances before financial statements are prepared. They ensure revenue and expenses are recognized in correct period under accrual accounting. The five types are accrued revenues, accrued expenses, deferred revenues, prepaid expenses, and depreciation. Without them, your income statement and balance sheet are wrong.
Your books might be current. Every transaction is entered, every bank feed is matched, every invoice is sent. But if adjusting entries haven't been posted, financial statements are still wrong.
That $12,000 insurance policy paid in January? Without an adjusting entry, full $12,000 sits as an expense in January instead of being spread across 12 months. The salary your employees earned between December 16 and December 31 but won't get paid until January 5? Without an accrual entry, December's payroll expense is understated and January's is overstated.
Adjusting entries accounting is process that fixes these timing gaps. Every business on accrual accounting (which is every business following GAAP) needs them at every close. This guide covers what they are, five types with journal entry examples, when to record them, and how to handle them in QuickBooks Online.
What are adjusting entries
Adjusting entries are journal entries recorded at end of an accounting period (monthly, quarterly, or annually) to update accounts that wouldn't otherwise reflect correct balance. They exist because of timing differences between when cash moves and when economic activity actually happens.
Investopedia defines an adjusting journal entry as a journal entry in a company's general ledger that occurs at end of an accounting period to record any unrecognized income or expenses for period.
Two rules apply to every adjusting entry:
- It always involves at least one income statement account (revenue or expense) and at least one balance sheet account (asset or liability)
- It never involves cash account. If cash is moving, that's a regular transaction, not an adjustment.
The second rule is key distinction. Regular journal entries record cash transactions. Adjusting journal entries record non-cash timing differences, things that have happened economically but haven't been recorded yet because no cash changed hands.
Where adjusting entries fit in accounting cycle
Adjusting entries come after all regular transactions are recorded and before financial statements are generated. In standard accounting cycle:
- Record daily transactions
- Post to general ledger
- Prepare unadjusted trial balance
- Record adjusting entries (you are here)
- Prepare adjusted trial balance
- Generate financial statements
- Record closing entries
If you skip step 4, financial statements in step 6 are based on unadjusted numbers. They'll balance (debits still equal credits), but amounts won't reflect reality.
The five types of adjusting entries
Every adjusting journal entry falls into one of five categories. Each one corrects a specific type of timing mismatch.
1. Accrued revenues (revenue earned, not yet billed)
You've delivered work or product, but you haven't invoiced customer yet. The revenue belongs in this period even though cash hasn't arrived.
Example: Your consulting firm completed $8,000 of work for a client in March. The invoice won't go out until April 5.
December's P&L now includes salary expense. The balance sheet shows liability. When payroll runs on January 5, you reverse accrual and record actual payment.
Other common accrued expenses: interest on loans (accrues daily, paid monthly), utilities (consumed all month, billed in arrears), and professional fees (work completed, invoice pending).
3. Deferred revenues (cash received, service not yet delivered)
A customer paid you upfront, but you haven't delivered product or service yet. Under accrual accounting, you can't recognize revenue until it's earned.
Example: A SaaS company receives $24,000 for a 12-month annual subscription starting April 1.
After 12 months, deferred revenue balance is $0 and full $24,000 has been recognized as revenue. If your SaaS startup collects annual payments and doesn't have deferred revenue on balance sheet, your revenue is overstated. This is most common audit finding in startup due diligence. For how deferred revenue works as a liability, see that guide.
4. Prepaid expenses (cash paid, benefit not yet consumed)
You paid for something upfront, but benefit extends across multiple periods. The unearned portion stays as an asset on balance sheet.
Example: $6,000 paid for a 6-month software license starting January 1.
Initial entry on payment:
The prepaid expenses guide covers this category in full detail, including IRS 12-month rule and automation methods.
5. Depreciation (allocating asset cost over useful life)
Fixed assets (equipment, vehicles, furniture) lose value over time. Depreciation records that decline as an expense each period.
Example: A $30,000 vehicle with a 5-year useful life, straight-line depreciation. Annual depreciation = $6,000. Monthly = $500.
Depreciation doesn't involve cash. It's purely an accounting adjustment that matches cost of asset to periods that benefit from using it. The depreciation methods guide covers straight-line, MACRS, and double-declining balance in detail.
What is adjustment entry vs. regular journal entry
A regular journal entry records a transaction that actually happened (a sale, a payment, a purchase). An adjustment entry records an economic event that hasn't generated a transaction yet.
In QuickBooks Online, regular journal entries are created by anyone with right permissions. Adjusting journal entries(marked as "Adjusting Entry: True" in audit log) can only be created through QuickBooks Online Accountant. This distinction matters because QBO's Adjusted Trial Balance report separates adjusting entries from regular ones, making it easier to see impact of adjustments on financials.
How to record adjusting entries in QuickBooks Online
If you're using QBO Accountant (version for accounting professionals), process is:
- Sign in to QuickBooks Online Accountant
- Open client's company file
- Select + Create and choose Journal Entry
- Check Is Adjusting Journal Entry? box
- Enter debit and credit accounts with amounts
- Add a memo describing adjustment (this matters for audit trail)
- Save
If you're on regular QBO (not Accountant version), you can create standard journal entries but they won't be tagged as adjusting entries. The numbers are same, but they won't appear separately on Adjusted Trial Balance.
For recurring adjustments (monthly depreciation, prepaid amortization), set up recurring journal entries in QBO so they post automatically. This saves time and prevents missed entries at month end.
If you need to fix or undo an adjusting entry, QBO lets you reverse or delete journal entries through Chart of Accounts register.
Common adjusting entry mistakes
Forgetting to reverse accruals. If you accrued $15,000 in payroll at December 31, you need to reverse that accrual when actual payroll runs in January. Otherwise, expense is recorded twice: once as accrual and once as actual payment.
Not posting prepaids monthly. A $12,000 annual insurance prepaid should generate 12 monthly entries of $1,000 each. If amortization entries aren't posted, prepaid expense balance stays inflated and expenses are understated.
Skipping depreciation. Monthly depreciation is easy to forget because no vendor sends a bill for it. Without depreciation entries, your fixed asset values are overstated and your expenses are understated. Both balance sheet and P&L are wrong.
Recording adjustments after closing. Adjusting entries must be posted before closing entries. If you close period first and then post adjustments, net income transferred to retained earnings won't include adjustments. In QBO, if closing date is already set, you'll need to edit closed books to post adjustments to a prior period.
Using adjusting entries as a crutch. If you're posting 30+ adjusting entries every close, underlying transaction recording process is probably broken. Most of those adjustments should be standard entries recorded during month. Adjusting entries should handle accruals, deferrals, and depreciation, not fix categorization errors that should have been caught during bank reconciliation.
If your chart of accounts is set up correctly, recurring adjustments are predictable and can be automated. The adjusted balances are then verified during balance sheet reconciliation. Firms running a continuous accounting workflow distribute these entries throughout month rather than batching them at close.
How Finlens automates adjusting entries
Finlens automates recurring adjusting entries that eat up close time: prepaid amortization schedules, depreciation schedules, and template-based accruals. Set them up once per client and they post automatically at period end.
For accounting firms doing actual close, this eliminates most forgettable (and most frequently missed) part of process. The bookkeeper reviews posted adjustments and handles one-off entries that require judgment. The routine entries run on their own.
FAQ
What are adjusting entries?
Adjusting entries are journal entries recorded at end of an accounting period to update account balances for timing differences. They ensure revenue is recognized when earned and expenses when incurred, regardless of when cash moves. The five types are: accrued revenues, accrued expenses, deferred revenues, prepaid expenses, and depreciation.
What is an adjusting journal entry?
An adjusting journal entry is a journal entry that corrects or updates an account balance at period end. It always involves one income statement account and one balance sheet account, and it never involves cash. In QuickBooks Online Accountant, these are tagged separately from regular journal entries.
What is adjustment entry?
An adjustment entry (also called an adjusting entry) is a journal entry made at end of an accounting period to record revenue or expenses that belong to current period but haven't been recorded through normal transactions. Common examples include accrued salaries, prepaid expense amortization, and depreciation.
When should adjusting entries be recorded?
At end of every accounting period, after all regular transactions are entered and before financial statements are generated. For most businesses, this means monthly at close. They must be posted before closing entries.
What's difference between adjusting entries and closing entries?
Adjusting entries update account balances to reflect economic reality (accruals, deferrals, depreciation). Closing entries zero out temporary accounts (revenue, expenses) by transferring balances to retained earnings. Adjustments come first. Closing comes after.
Can I make adjusting entries in regular QuickBooks Online?
You can create regular journal entries with same debits and credits, but they won't be tagged as "adjusting" entries. Only QuickBooks Online Accountant supports adjusting entry designation, which separates them on Adjusted Trial Balance report.
How many adjusting entries should I expect at month-end?
It depends on business complexity, but a typical small business has 5 to 15 adjusting entries per month: depreciation (1 per asset class), prepaid amortization (1 per prepaid), payroll accrual (1), and any revenue accruals or deferrals. If you're posting 30+, your day-to-day recording process likely needs fixing.
