An adjusting entry is a journal entry made at the end of an accounting period to update account balances before financial statements are prepared.
Adjusting entries handle five situations:
- Accrued revenues — revenue that’s been earned but not yet recorded (e.g., services performed but not yet billed)
- Accrued expenses — expenses that have been incurred but not yet recorded (e.g., wages owed but not yet paid)
- Deferred revenues — cash received before it’s earned (e.g., a subscription payment collected in advance)
- Deferred expenses — cash paid before the expense is incurred (e.g., prepaid rent or insurance)
- Depreciation — the allocation of a long-lived asset’s cost over its useful life
The common thread is timing. Under accrual accounting, revenue and expenses must land in the period they belong to, not the period when cash happens to move. Adjusting entries close that gap. They never involve the cash account — if cash moved, it was already recorded in an earlier transaction. What adjusting entries do is reallocate amounts between balance sheet and income statement accounts so the numbers reflect economic reality at period-end.
Related terms
- Journal — the book of original entry where adjusting entries are recorded
- Accrual accounting — the accounting basis that makes adjusting entries necessary
- Depreciation — one of the most common adjusting entries
- Financial statements — the reports that adjusting entries prepare accounts for