Adjusting journal entries are accounting entries made near the end of an accounting period to update accounts before financial statements are prepared.
They help ensure that revenue and expenses are recorded in the correct period, even when cash has not yet been received or paid. They are also used when prepaid expenses are consumed, assets lose value through depreciation, or estimates such as doubtful accounts need to be recognized.
For accounting students and junior bookkeepers, adjusting entries are an important step because they connect everyday transaction recording with the final financial statements.
The basic accounting flow is:
Transactions → General Ledger → Trial Balance → Adjusting Journal Entries → Adjusted Trial Balance → Financial Statements
If you already understand the trial balance, learning adjusting entries is the natural next step.
What Are Adjusting Journal Entries?
Adjusting journal entries are entries made to update account balances before financial statements are finalized.
They normally deal with transactions or accounting events that are not fully reflected in the regular bookkeeping records.
For example, imagine that a company pays $12,000 for a one-year insurance policy.
When the payment is first made, it may be recorded as a prepaid asset.
But after one month, part of that insurance has been used.
The books therefore need an adjustment to recognize one month’s insurance expense.
Another example involves wages.
Employees may work during the final few days of December but receive payment in January.
The expense belongs to December because that is when the employees performed the work.
An adjusting entry can recognize the expense and related liability before December financial statements are prepared.
These adjustments help the accounting records better reflect what actually happened during the reporting period.
Why Are Adjusting Entries Needed?
Regular bookkeeping records cash receipts, payments, invoices and other routine transactions.
However, not every accounting event happens at exactly the same time as the related cash movement.
That creates the need for adjusting entries accounting procedures.
They place expenses in the correct period
Suppose a business uses electricity throughout December but receives the bill in January.
The electricity relates to December operations.
An accrued expense adjustment may therefore be required at the end of December.
They recognize revenue when appropriate
A company may earn revenue before issuing an invoice or receiving cash.
An accrued revenue adjustment may be necessary.
They update prepaid assets
Businesses often pay in advance for:
- Insurance
- Rent
- Software subscriptions
- Service contracts
As time passes, part of the prepaid asset becomes an expense.
They recognize depreciation
Equipment, furniture and other capital assets may provide value over multiple periods.
Depreciation allocates part of an asset’s cost over its useful accounting life.
They account for estimates
Some accounting balances cannot be known with perfect certainty at period end.
For example, a business may estimate that part of its receivables will not be collected.
An adjusting entry may be used to recognize that estimate.
In short, adjusting entries help move the books from the unadjusted trial balance toward a more complete adjusted trial balance.
When Are Adjusting Journal Entries Made?
Adjusting entries are commonly prepared near the end of an accounting period.
That might be:
- Month-end
- Quarter-end
- Year-end
The frequency depends on the organization’s reporting needs.
A company preparing monthly management reports may make certain adjustments every month.
Another business may make some adjustments primarily during year-end accounting.
The important principle is that accounts should be reviewed before financial statements are finalized.
The bookkeeping process might look like:
- Record normal transactions
- Post them to the general ledger
- Prepare an unadjusted trial balance
- Review accounts
- Identify necessary adjustments
- Post adjusting journal entries
- Prepare an adjusted trial balance
- Prepare financial statements
This sequence is part of full-cycle bookkeeping in Canada.
How Does an Adjusting Entry Work?
A normal adjusting entry generally affects at least two accounts because double-entry accounting still applies.
Consider a simple example.
A company owes employees $2,000 in wages that have been earned but not yet paid.
The adjusting journal entry may be:
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | $2,000 | |
| Wages Payable | $2,000 |
The expense is recognized in the current period.
At the same time, the company records a liability because payment is still owed.
The adjustment changes both the income statement and balance sheet accounts.
Understanding which accounts should be used depends heavily on having a well-designed chart of accounts.
7 Common Adjusting Journal Entries With Examples
Below are seven practical adjusting entries examples commonly introduced in bookkeeping and accounting training.
1. Accrued Expense Adjusting Entry
An accrued expense is an expense that has been incurred but has not yet been paid or fully recorded.
Imagine employees have earned $3,000 in wages by December 31, but payroll will not be paid until January.
The December adjustment could be:
| Account | Debit | Credit |
|---|---|---|
| Wages Expense | $3,000 | |
| Wages Payable | $3,000 |
Why is this adjustment necessary?
Without the entry:
- December expenses would be understated
- Liabilities would be understated
- Profit could be overstated
The business benefited from employee work in December, so the expense belongs to December even though cash will leave the bank later.
Other accrued expenses could include:
- Interest
- Utilities
- Professional fees
- Contractor expenses
The exact accounting treatment depends on the facts and reporting framework used.
2. Accrued Revenue Adjusting Entry
Accrued revenue occurs when a business has earned revenue but has not yet billed the customer or received payment.
Suppose a consulting company completes $2,500 of work before month-end but plans to issue the invoice in the following month.
A simplified adjustment could be:
| Account | Debit | Credit |
|---|---|---|
| Accrued Receivable / Accounts Receivable | $2,500 | |
| Service Revenue | $2,500 |
The entry recognizes revenue in the period when the work was performed.
When the invoice or payment is later processed, the accounting system must be handled carefully so the revenue is not recorded twice.
This is where understanding accounts payable vs accounts receivable becomes useful.
3. Prepaid Expenses Journal Entry
A prepaid expense is a payment made before the related benefit is fully used.
Common examples include:
- Insurance
- Rent
- Annual software subscriptions
- Maintenance contracts
Suppose a business pays $12,000 for 12 months of insurance on January 1.
Initially:
| Account | Debit | Credit |
|---|---|---|
| Prepaid Insurance | $12,000 | |
| Bank | $12,000 |
After one month, the business has used:
$12,000 ÷ 12 = $1,000
The adjusting entry could be:
| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | $1,000 | |
| Prepaid Insurance | $1,000 |
After the adjustment:
- Insurance expense increases
- Prepaid insurance decreases
The asset now represents only the unused portion.
This is one of the most common examples used when learning adjusting journal entries.
4. Unearned Revenue Adjusting Entry
Unearned revenue happens when a business receives money before earning it.
Suppose a client pays $6,000 in advance for six months of services.
When payment is first received:
| Account | Debit | Credit |
|---|---|---|
| Bank | $6,000 | |
| Unearned Revenue | $6,000 |
After one month, the company has earned:
$6,000 ÷ 6 = $1,000
The adjusting entry could be:
| Account | Debit | Credit |
|---|---|---|
| Unearned Revenue | $1,000 | |
| Service Revenue | $1,000 |
The liability decreases because part of the obligation has now been fulfilled.
Revenue increases because the company has earned that portion.
5. Depreciation Journal Entry
A depreciation journal entry recognizes part of the cost of a capital asset as an expense over time.
Suppose a business has equipment and determines that $2,400 of depreciation should be recognized for the accounting period.
A simplified adjusting entry may be:
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | $2,400 | |
| Accumulated Depreciation | $2,400 |
Notice that the equipment account itself is not necessarily directly credited in this example.
Instead, a separate accumulated depreciation account tracks the cumulative depreciation recognized against the asset.
Why use accumulated depreciation?
It allows the accounting records to show:
- Original asset cost
- Accumulated depreciation
- Remaining carrying amount
Students should also remember that book depreciation and Canadian tax depreciation/CCA are not automatically the same thing.
For corporate tax preparation, tax treatment is considered separately from financial accounting depreciation.
That distinction becomes important when working with T2 corporate tax files.
6. Bad Debt Expense Journal Entry
Businesses that sell on credit may not collect every receivable.
Accounting may therefore require an estimate of amounts that could become uncollectible.
Suppose accounts receivable total $50,000, and based on the business’s accounting estimate, $1,500 should be recognized as potentially uncollectible.
A simplified adjustment might be:
| Account | Debit | Credit |
|---|---|---|
| Bad Debt Expense | $1,500 | |
| Allowance for Doubtful Accounts | $1,500 |
This creates an expense while establishing an allowance associated with receivables.
The actual method used can depend on the business’s accounting framework and circumstances.
For students, the important concept is that an estimate can require an adjustment even before a specific customer account is finally written off.
7. Supplies Adjusting Entry
Businesses may purchase supplies in advance and use them over time.
Suppose the accounting records show:
Office Supplies Asset: $2,000
At month-end, a physical count shows only:
$600 of supplies remaining
Supplies used:
$2,000 − $600 = $1,400
The adjusting entry could be:
| Account | Debit | Credit |
|---|---|---|
| Supplies Expense | $1,400 | |
| Office Supplies | $1,400 |
The adjustment moves the consumed portion from an asset to an expense.
After the entry, the supplies account shows the remaining $600.
Adjusting Entries Example: Putting Several Adjustments Together
Suppose a business prepares its books at December 31 and discovers:
- Unpaid wages: $2,500
- Insurance used: $1,000
- Depreciation: $1,500
- Revenue earned but not billed: $3,000
- Supplies used: $700
The adjustments would include:
Wages
Debit: Wages Expense $2,500
Credit: Wages Payable $2,500
Insurance
Debit: Insurance Expense $1,000
Credit: Prepaid Insurance $1,000
Depreciation
Debit: Depreciation Expense $1,500
Credit: Accumulated Depreciation $1,500
Accrued Revenue
Debit: Accounts Receivable $3,000
Credit: Service Revenue $3,000
Supplies
Debit: Supplies Expense $700
Credit: Supplies $700
After these entries are posted, the business can prepare an adjusted trial balance.
Adjusting Entries and the Trial Balance
Adjusting entries and the trial balance are directly connected.
The sequence is:
Step 1: Prepare an unadjusted trial balance
This contains account balances before period-end adjustments.
Step 2: Review accounts
Look for things such as:
- Unrecorded expenses
- Prepayments
- Accrued revenue
- Depreciation
- Estimates
- Deferred revenue
Step 3: Record adjusting journal entries
Post the necessary adjustments to the appropriate accounts.
Step 4: Prepare an adjusted trial balance
The new report reflects the updated account balances.
For a full walkthrough of this report, see our Trial Balance: 7 Easy Steps With Practical Example.
Unadjusted Trial Balance vs Adjusted Trial Balance
The distinction is simple.
| Unadjusted Trial Balance | Adjusted Trial Balance |
|---|---|
| Prepared before adjusting entries | Prepared after adjusting entries |
| Reflects existing ledger balances | Reflects revised ledger balances |
| Helps identify adjustments | Helps support financial statements |
| Earlier in accounting cycle | Later in accounting cycle |
For example, before adjustment:
Insurance Expense: $0
After recognizing one month of insurance:
Insurance Expense: $1,000
The adjusted trial balance now contains the more appropriate period-end amount.
Adjusting Entries vs Regular Journal Entries
Both use debits and credits, but they serve different purposes.
Regular journal entries
These record normal business transactions such as:
- Paying rent
- Receiving customer payments
- Purchasing equipment
- Recording supplier invoices
- Recording sales
Adjusting journal entries
These update account balances at period end.
They frequently deal with:
- Timing differences
- Accruals
- Deferrals
- Estimates
- Depreciation
A good bookkeeper needs to understand both.
Adjusting Entries vs Closing Entries
Beginners sometimes confuse adjusting entries with closing journal entries.
They are different.
| Adjusting Entries | Closing Entries |
|---|---|
| Update account balances | Close temporary accounts |
| Made before financial statements | Normally made after financial statements |
| Deal with accruals, deferrals and estimates | Prepare accounts for the next accounting period |
| Affect period-end accuracy | Reset temporary account balances |
Examples of temporary accounts can include revenue and expense accounts.
Adjusting entries first make sure the period’s numbers are properly recognized.
Closing entries then deal with closing the appropriate temporary accounts.
Because closing entries has its own strong search intent, we will treat that as a separate GTGH article rather than trying to rank this page for both topics.
Month-End Close and Adjusting Entries
Adjusting entries often form part of the month-end close process.
A month-end review may involve tasks such as:
- Reconciling bank accounts
- Reviewing accounts receivable
- Reviewing accounts payable
- Checking payroll balances
- Reviewing prepaid expenses
- Recording depreciation
- Recording accruals
- Reviewing unusual accounts
- Posting adjusting entries
- Preparing an adjusted trial balance
- Reviewing financial statements
This is why accounting concepts should be learned as a connected workflow.
For example:
A bank reconciliation may reveal a missing bank charge.
The bookkeeper records the missing transaction.
That changes the general ledger.
The updated amount then appears in the trial balance.
Other period-end issues may require separate adjusting journal entries.
This connected process is much closer to real bookkeeping work than learning isolated definitions.
How Adjusting Entries Affect Financial Statements
Adjusting entries can affect both:
Income Statement
They may change:
- Revenue
- Wages expense
- Insurance expense
- Depreciation expense
- Bad debt expense
- Supplies expense
Balance Sheet
They may change:
- Accounts receivable
- Prepaid assets
- Accrued liabilities
- Unearned revenue
- Accumulated depreciation
- Allowance accounts
Consider the accrued wages example.
Without adjustment:
Wages Expense = understated
Wages Payable = understated
After adjustment:
Both accounts better reflect the period-end position.
This demonstrates why adjusting entries matter beyond simply making bookkeeping records look tidy.
Adjusting Journal Entries in Accounting Software
Modern accounting software allows bookkeepers to create journal entries digitally.
A typical process may include:
- Select the journal entry function
- Enter the transaction date
- Choose the debit account
- Enter the debit amount
- Choose the credit account
- Enter the credit amount
- Add a useful description
- Attach supporting documentation where appropriate
- Review the entry
- Post the entry
But software cannot decide whether an adjustment is conceptually correct.
A user still needs to understand:
- Which accounts should change
- Why the adjustment is required
- Which accounting period it belongs to
- Whether the amount is supported
- Whether the entry could duplicate an existing transaction
For students learning digital bookkeeping, our guide to the best accounting software in Canada provides additional context about tools used in accounting work.
Common Adjusting Journal Entry Mistakes
1. Adjusting the wrong accounting period
Make sure the adjustment belongs to the period being reported.
2. Using the wrong account
For example, do not automatically post every adjustment to a miscellaneous expense account.
Choose the account that represents the actual transaction.
3. Forgetting the second side of the entry
Double-entry accounting still applies.
A debit must have corresponding credit effects.
4. Recording an expense twice
Suppose a supplier invoice was already recorded.
Creating an additional accrual for the same amount could duplicate the expense.
Always review existing records first.
5. Confusing cash movement with accounting recognition
Cash does not always determine when an expense or revenue belongs in the accounts.
That is one of the main reasons adjusting entries exist.
6. Using unsupported estimates
An estimate should have a reasonable accounting basis.
Do not invent numbers simply to make financial reports look better.
7. Forgetting to review the adjusted trial balance
After adjustments are posted, generate and review the updated trial balance.
8. Posting directly without documentation
Good bookkeeping includes clear descriptions and supporting calculations.
Someone reviewing the file later should be able to understand why the adjustment was made.
How to Review Adjusting Entries Before Posting
A simple review checklist can prevent errors.
Before posting an adjustment, ask:
Is there a real reason for the entry?
Understand what event or condition requires the adjustment.
Is the amount supported?
Use:
- Invoices
- Contracts
- Payroll calculations
- Asset schedules
- Insurance schedules
- Other reliable documentation
Are the correct accounts being used?
Review the chart of accounts rather than creating unnecessary new accounts.
Does the entry belong to this reporting period?
Check dates carefully.
Has the transaction already been recorded?
Avoid duplicates.
Do total debits equal total credits?
The journal entry must remain balanced.
How will the entry affect financial statements?
Understand the result before posting.
Why Adjusting Journal Entries Matter for Bookkeepers
Adjusting journal entries are where bookkeeping starts moving beyond basic data entry.
A person can learn how to enter invoices and expenses into software fairly quickly.
But period-end accounting requires more judgment.
A bookkeeper may need to determine:
- Whether an expense has been incurred but not recorded
- Whether part of a prepaid asset has expired
- Whether revenue has been earned
- Whether depreciation should be recorded
- Whether a balance needs investigation
- Whether an adjustment affects current-period reporting
This requires understanding the relationship between:
Source Documents → Journal Entries → Ledger → Reconciliation → Trial Balance → Adjustments → Financial Statements
That is why practical training matters.
Students who want hands-on experience with accounting workflows can explore GTGH’s practical bookkeeping course.
The course-focused learning path becomes much easier when concepts such as bank reconciliation, chart of accounts and trial balance are learned together.
Frequently Asked Questions About Adjusting Journal Entries
What are adjusting journal entries?
Adjusting journal entries are entries made near the end of an accounting period to update account balances before financial statements are prepared. Common adjustments involve accruals, prepaid expenses, depreciation, unearned revenue and accounting estimates.
What are the main types of adjusting entries?
Common types include accrued expenses, accrued revenue, prepaid expenses, unearned revenue, depreciation and certain estimates such as doubtful accounts. The adjustments required depend on the business and its accounting records.
What is an example of an adjusting entry?
If employees earned $2,000 in wages before period-end but will be paid later, a business may debit Wages Expense for $2,000 and credit Wages Payable for $2,000.
Why are adjusting entries important?
They help ensure that account balances reflect the appropriate accounting period before financial statements are prepared. Without necessary adjustments, revenue, expenses, assets or liabilities could be misstated.
When are adjusting journal entries made?
They are commonly prepared during period-end accounting, such as month-end, quarter-end or year-end, depending on the organization’s reporting requirements.
What happens after adjusting entries are posted?
After the required adjustments are posted to the ledger, an adjusted trial balance can be prepared. Those updated balances then help support preparation of financial statements.
What is the difference between adjusting entries and closing entries?
Adjusting entries update account balances before financial statements are finalized. Closing entries generally occur later and close appropriate temporary accounts for the completed accounting period.
Do adjusting entries always involve cash?
No. Many adjusting entries specifically deal with accounting events where the related cash movement occurred earlier or will occur later. Examples include accruals, prepaid expenses and depreciation.
Final Thoughts
Adjusting journal entries are an essential part of accurate period-end accounting.
They help update the books for transactions and accounting events that routine daily entries may not fully capture.
For beginners, focus on understanding the logic behind each adjustment rather than simply memorizing debit and credit combinations.
Ask three questions:
What happened during the accounting period?
Which accounts should reflect it?
Has the event already been properly recorded?
Once those questions are answered, the journal entry becomes much easier to understand.
The most useful learning sequence is:
Chart of Accounts → Regular Journal Entries → General Ledger → Bank Reconciliation → Trial Balance → Adjusting Journal Entries → Adjusted Trial Balance → Financial Statements
If you want practical experience working through these accounting processes, explore the Get Trained Get Hired Bookkeeping Course.
