Adjusting Entries

Journal entries made at period-end to ensure expenses and revenues are correctly recorded.

QUICK ANSWER

Adjusting entries are journal entries made at the end of an accounting period to ensure that revenues and expenses are recorded in the correct period under the accrual accounting method. They are a necessary step before preparing financial statements.

In depth

There are four main types of adjusting entries: accrued revenues (earned but not yet recorded), accrued expenses (incurred but not yet paid), deferred revenues (received but not yet earned), and prepaid expenses (paid in advance but not yet used). Each type ensures that the financial statements accurately reflect what happened during the period, not just when cash was exchanged.

Adjusting entries never involve cash — they always affect at least one balance sheet account and one income statement account, keeping the books balanced while correcting the timing of recognition.