Learn Business · Accounting Foundations
Adjusting Entries: Put Revenue and Expenses in the Right Period
Learn accruals, prepayments, unearned revenue, and depreciation. Follow six worked examples, connect each entry to financial statements, and practice the month-end reasoning. Explore worked examplesTest your reasoningWhat are adjusting entries?
Adjusting entries update the ledger for revenue earned and expenses incurred that routine transaction posting has not yet fully recognized. They are usually prepared at period-end, before the adjusted trial balance and financial statements. A business can pay for insurance before using it, collect a customer advance before earning it, or receive employee work before issuing payroll. Without adjustments, cash timing can distort the profit reported for each month.Start with the reporting period. Ask what was earned, used, consumed, or owed by the cutoff date. Compare the required ending balance with what is already recorded.
The Accounting Cycle guide places these entries between the unadjusted trial balance and financial statements. If selecting the debit and credit is still difficult, start with the Journal Entries guide.
Accruals, deferrals, and estimates
| Type | Timing problem | Typical entry |
|---|---|---|
| Accrued expense | Cost incurred before payment or billing | Debit Expense; credit Payable |
| Accrued revenue | Revenue earned before collection and not yet recorded | Debit Receivable; credit Revenue |
| Prepaid cost / supplies used | Asset benefit consumed after purchase | Debit Expense; credit Asset |
| Unearned revenue earned | Obligation fulfilled after advance receipt | Debit Unearned Revenue; credit Revenue |
| Depreciation | Allocate depreciable cost over periods benefiting from use | Debit Depreciation Expense; credit Accumulated Depreciation |
Does an adjusting entry include Cash?
The standard accrual and deferral adjustments here do not change Cash: the cash event happened earlier or will happen later. A bank fee discovered during reconciliation may require a separate cash entry. Do not force every entry made during a close into the same category.How to calculate an adjusting entry
- Set the cutoff. Identify the period and the date on which balances must be correct.
- Read the support. Use contracts, time records, counts, invoices, depreciation schedules, or evidence of completed services.
- Check existing posting. An invoice or payroll transaction may already include the amount. Read the ledger and supporting detail.
- Calculate the required balance or period amount. Show the rate, quantity, elapsed coverage, or completion calculation.
- Record only the missing adjustment. Apply the debit/credit rules and verify equal totals.
- Review the result and next step. Tie the new balance to the schedule and document how an accrual will be settled or reversed.
Six worked adjusting entries
These adjustments belong to one fictional service business for October. Each adjustment is previously unrecorded, with the initial asset or liability balances described below. Taxes and other transactions are excluded.1. Accrue unpaid wages
Employees earned $800 through October 31. Those wages are not yet paid or recorded. Time records support the amount.| Account | Debit | Credit |
|---|---|---|
| Wages expense | 800.00 | — |
| Wages payable | — | 800.00 |
2. Recognize earned, unbilled service revenue
The business completed $1,200 of services by October 31 that meets the revenue-recognition criteria and is not yet recorded. Assume it has an unconditional right to payment; only time is required before payment is due.| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 1,200.00 | — |
| Service revenue | — | 1,200.00 |
3. Expense one month of prepaid insurance
On October 1, a $2,400 policy covering October through September was recorded in Prepaid Insurance. Assume coverage benefits each month equally. One month expired: $2,400 ÷ 12 = $200.| Account | Debit | Credit |
|---|---|---|
| Insurance expense | 200.00 | — |
| Prepaid insurance | — | 200.00 |
4. Recognize supplies consumed
The Supplies account has an unadjusted debit balance of $900. A supported October 31 count shows $350 remains. Supplies used = $900 − $350 = $550.| Account | Debit | Credit |
|---|---|---|
| Supplies expense | 550.00 | — |
| Supplies | — | 550.00 |
5. Recognize revenue from a customer advance
A $1,800 customer advance was previously credited to Unearned Revenue. The business satisfies one-third of the service obligation by October 31. Assume the agreement supports recognizing $600 for that performance.| Account | Debit | Credit |
|---|---|---|
| Unearned revenue | 600.00 | — |
| Service revenue | — | 600.00 |
6. Record monthly depreciation
Equipment costs $12,000, has a $2,000 estimated residual value, and a five-year estimated useful life. Assume straight-line depreciation and one full month in use. Annual depreciation = ($12,000 − $2,000) ÷ 5 = $2,000. Monthly depreciation = $2,000 ÷ 12 = $166.67, rounded.| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 166.67 | — |
| Accumulated depreciation | — | 166.67 |
What changes in the financial statements?
After posting adjustments, use the Trial Balance and Adjusted Trial Balance guide to check the updated ledger balances before preparing financial statements.
Together, the examples add $1,800 of revenue and $1,716.67 of expenses. The net increase in October profit is $83.33. This is the effect of the adjustments only, not total net income.| Measure | Change | Calculation |
|---|---|---|
| Revenue | +1,800.00 | 1,200 unbilled + 600 advance earned |
| Expenses | +1,716.67 | 800 wages + 200 insurance + 550 supplies + 166.67 depreciation |
| Net income / equity | +83.33 | Revenue change minus expense change |
| Net assets | +283.33 | 1,200 receivable − 200 prepaid − 550 supplies − 166.67 depreciation |
| Liabilities | +200.00 | 800 wages payable − 600 unearned revenue |
| Cash | 0.00 | No new cash event |
Δ Assets $283.33 = Δ Liabilities $200.00 + Δ Equity $83.33
Omitting the wage accrual understates liabilities and expenses and overstates profit. Omitting the earned advance leaves liabilities too high and revenue too low. A balanced trial balance cannot detect either missing entry.
After posting, prepare the adjusted trial balance and use it for financial statements. Closing entries later transfer temporary-account results into equity. Adjusting entries and closing entries have different jobs.
Settlement and optional reversing entries
Paying an accrued amount without reversal
Suppose the $800 wage accrual is paid next period, with no additional wages and no reversal. Debit Wages Payable $800 and credit Cash $800. Expensing that same $800 again duplicates the cost.Using a reversal with a routine workflow
Some organizations reverse selected accruals on the first day of the next period. The wage reversal debits Wages Payable $800 and credits Wages Expense $800. When routine payroll subsequently debits Wages Expense $800 and credits Cash $800, the two next-period expense amounts offset. October retains its $800 expense. Reversals are optional and depend on the workflow. They are not automatic for every adjustment: prepaid amortization, advance recognition, and depreciation generally continue through their schedules. Track each accrual’s settlement so an invoice does not leave an accrual outstanding or duplicate an expense. If a later bill differs from an estimate, review the facts and period implications before recording the difference. Preserve the audit trail and follow the organization’s correction process.A practical month-end review checklist
Completeness
Inspect late invoices, unpaid services, time records, completed customer work, and recurring expenses. Confirm which activity belongs before cutoff.Supported balances
Tie prepayments to coverage schedules, advances to remaining obligations, supplies to counts, and depreciation to the fixed-asset schedule.Controlled posting
Document a reference, date, explanation, preparer, reviewer, and next-period treatment. Check for existing source-system transactions.Never use an adjustment as a plug. Equal debits and credits prove arithmetic balance, not a valid account, amount, cutoff, or economic explanation.
Practice adjusting entries
Work out the amount, accounts, and period before revealing the answer.An annual $3,600 policy begins October 1. What is the October 31 adjustment?
Assuming equal monthly coverage and initial asset recording, debit Insurance Expense $300 and credit Prepaid Insurance $300. The remaining prepaid asset is $3,300.A $1,400 supplies balance is supported by $450 remaining. What was used?
$1,400 − $450 = $950. Debit Supplies Expense $950 and credit Supplies $950, after reviewing the count and any unusual loss.An $800 accrued bill is paid next period. Should you expense it again?
With no reversal and no difference from the accrual, debit the accrued payable $800 and credit Cash $800. A workflow recording the bill first must clear or offset the accrual to avoid duplicate expense.A $2,000 customer advance is 25% earned. What remains unearned?
Recognize $500: debit Unearned Revenue and credit Service Revenue. The remaining liability is $1,500. Recognition must follow performance under the agreement.A required payable is $900, but $250 is already recorded for the same obligation. What additional accrual is needed?
Record $650, assuming the existing balance is valid: debit the appropriate Expense $650 and credit the Payable $650. Accrue the missing difference.Does recording depreciation reduce Cash?
No. Debit Depreciation Expense and credit Accumulated Depreciation. Purchase or financing was a separate event; this entry allocates cost to the period.Continue learning
Connect adjustments to the complete accounting cycle.
Review the debit/credit foundation, then follow transactions through adjustments, statements, and closing with the complete worked business example. Review Journal EntriesFollow the Accounting CycleExplore AccountingFurther study and learning notes
The scenarios, amounts, combined analysis, and practice questions are original. For additional study, see these open-textbook sections.
- OpenStax: Adjustment process and common adjusting entries
- OpenStax: Record and post adjusting entries
Educational material for general learning. Actual recognition and measurement depend on applicable standards, contracts, materiality, and the organization’s policies.