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Adjusting Journal Entry

An adjusting journal entry is an accounting entry recorded at the end of a period to update balances so revenues and expenses appear in the correct period under accrual accounting.

What Is an Adjusting Journal Entry?

An adjusting journal entry is a journal entry made near the end of an accounting period to bring account balances up to date before financial statements are prepared. It makes sure revenue and expenses are recorded in the period in which they were actually earned or incurred, rather than only when cash changes hands.

Why Companies Make Them

Under accrual accounting, income is recorded when it is earned and expenses when they are incurred, regardless of when cash moves. Day-to-day transactions rarely capture everything, so adjustments fill the gaps. Common categories include:

  • Accruals: revenue earned or expenses incurred but not yet recorded or paid, such as wages owed to employees at period end.
  • Deferrals: cash received or paid before it is earned or used, such as a prepaid expense like insurance paid in advance, or unearned revenue from customers who paid early.
  • Estimates: non-cash items such as depreciation of equipment and allowances for doubtful accounts.

How It Works

Each adjusting entry usually affects one income statement account and one balance sheet account, so the books stay in balance. For example, as a company uses up part of a prepaid insurance policy, it debits insurance expense and credits prepaid insurance for the portion used. Adjustments are typically prepared after a trial balance is drawn up and before the financial statements are finalized.

Why It Matters to Investors

Adjusting entries affect reported profit and the balance sheet. Without them, reported earnings could differ meaningfully from the economic activity of the period. Many adjusted figures depend on management estimates, such as depreciation schedules or bad-debt allowances, which can change over time. Understanding that these estimates exist can help an investor interpret shifts in reported results. Adjustments are a normal part of the accounting process and do not by themselves indicate an error.

Updated October 14, 2026. For general education only; not financial, tax or legal advice.

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Related Terms

Accrual Accounting

Accrual accounting is a method of recording financial transactions when they are earned or incurred, regardless of when the related cash is actually received or paid.

Prepaid Expense

A prepaid expense is a cost a business pays in advance for goods or services it will receive later, recorded as an asset until the benefit is used up.

Unearned Revenue

Unearned revenue is cash a business receives from customers for goods or services it has not yet delivered. It is recorded as a liability until the company earns it through performance.

Depreciation

Depreciation is the accounting method of spreading the cost of a tangible, long-lived asset over the years it is expected to be used, recording a portion as an expense each year.

Trial Balance

A trial balance is a bookkeeping report listing every general ledger account's debit or credit balance at a set date, used to check that total debits equal total credits.

Accrued Expense

An accrued expense is a cost a business has incurred and must pay, recorded in the accounting period when it arises rather than when the cash actually leaves the company.

Deferred Revenue

Deferred revenue is cash a company receives for goods or services it has not yet delivered. It is recorded as a liability and recognized as revenue gradually as the obligation is fulfilled.