Adjusting Journal Entries: The 5 Types, With Worked Examples

Your bank balance is a fact. Your profit is an opinion — and adjusting journal entries are where that opinion gets formed. Two businesses can move exactly the same money in exactly the same month and report wildly different profit, entirely because of the handful of entries one of them posted on the last day and the other didn't.

Adjusting journal entries are the entries you post at the end of an accounting period to make sure each dollar of revenue and each dollar of expense lands in the month it actually belongs to, rather than the month the cash happened to move. They're the step that separates real accounting from watching a bank account. This guide covers what they are, the five types with a fully worked example of each, and the handful of rules that keep you from getting them wrong.

Why Adjusting Journal Entries Exist at All

Accrual accounting rests on two ideas. Revenue is recognized when it's earned, not when the customer pays. Expenses are recognized when they're incurred, not when you pay the bill — and, where possible, in the same period as the revenue they helped produce. That second idea is the matching principle, and it's the reason your income statement can be trusted as a measure of performance rather than a record of banking activity.

The problem is that cash rarely cooperates. Your September electricity bill arrives in October. Insurance is paid twelve months at a time. A customer pays for a year of service in January. A van bought in one month earns money for five years. Left alone, day-to-day bookkeeping records each of those events on the day money moved, which puts costs and revenue in the wrong months.

Adjusting entries are the correction. Posted on the last day of the period, before you produce financial statements, they redistribute those amounts into the right months.

Every adjusting journal entry hits one income statement account and one balance sheet account — and never cash. If your entry touches cash, it isn't an adjustment; it's a transaction you forgot to record.

The Five Types of Adjusting Journal Entries

Almost every adjustment you'll ever post falls into one of five buckets. Two deal with things that happened before the money moves (accruals), two with money that moved before the thing happened (deferrals), and one with an asset being used up.

1. Accrued expenses — you used it, nobody has billed you yet

You burned electricity all through September. The utility reads the meter on October 3 and bills you on October 12. Without an adjustment, September shows no power cost and October shows two months of it.

Say the September usage works out to $480. On September 30 you post:

September now carries its own power cost, and the balance sheet shows the $480 you owe. When the real bill lands in October you reverse the accrual (see the reversing-entries note below) and record the vendor bill normally, so the cost isn't counted twice. The same pattern covers accrued wages for days worked but not yet paid, accrued interest on a loan, and accrued sales commissions.

2. Accrued revenue — you did the work, you haven't invoiced it

The mirror image. A consultancy logs 22 hours at $150 on a client project during September but doesn't send the invoice until October 5. That $3,300 was earned in September, so September's income statement should show it.

This is the adjustment owners most often skip, and it's the one that makes a growing service business look like it's stalling. If you invoice in arrears, a month of hard work sits invisible until the invoice goes out — and every month's reported revenue is really last month's.

3. Prepaid expenses — you paid up front for something you'll use over time

On January 1 you pay $7,200 for twelve months of liability insurance. That's not a January expense; it's an asset you'll consume a month at a time. At payment:

Then, at the end of each of the twelve months, the adjusting entry that actually recognizes the cost:

By December 31 the prepaid asset has amortized to zero and each month carried $600. Annual software licences, prepaid rent, retainers paid to your attorney and yearly trade memberships all work the same way. A useful sanity check at year end: any prepaid balance that hasn't moved in months is usually an amortization schedule somebody stopped running.

4. Deferred revenue — the customer paid before you delivered

A customer buys a $12,000 annual maintenance plan on March 1 and pays in full. None of that is revenue on March 1 — it's a promise to perform, which makes it a liability. You collect it:

And each month, as you actually deliver, the adjusting entry earns one twelfth of it:

Customer deposits on jobs not yet finished behave identically — we walk through those in detail in how to record customer deposits. The tell that something's wrong here is a deferred revenue balance that only ever climbs: either releases aren't being posted, or the original sale was booked twice.

5. Depreciation — the asset is being used up

You buy a $30,000 delivery van with an estimated $5,000 salvage value and a five-year life. Straight-line, that's $25,000 spread over 60 months — $416.67 a month:

Note that the van's cost account is never reduced. Accumulated Depreciation is a contra-asset that sits beneath it, so the balance sheet always shows both what you paid and how much life you've used. Amortization of intangibles — a purchased customer list, capitalized software — follows the same shape. For the other three methods and full schedules, see how to calculate depreciation.

Three More Adjustments Worth Knowing

Beyond the classic five, three others show up regularly in small business books:

• Bad debt allowance. If an invoice is clearly uncollectible, debit Bad Debt Expense and credit Allowance for Doubtful Accounts, so receivables reflect what you'll realistically collect.
• Inventory adjustment. After a physical count, an entry brings the recorded inventory value in line with what's actually on the shelf, with the difference going to cost of goods sold or a shrinkage account.
• Accrued income tax. Estimated tax on the period's profit, debited to Income Tax Expense and credited to Income Taxes Payable.

Do adjusting journal entries need to be reversed?

Two of the five usually are. Accrued expenses and accrued revenue are typically reversed on the first day of the next period, so that when the actual bill or invoice arrives it can be entered the ordinary way without double-counting. Prepaid amortization, deferred revenue releases and depreciation are not reversed — each month's entry is simply the next slice of an ongoing schedule.

How are adjusting entries different from closing entries?

They're sequential, not interchangeable. Adjusting entries happen at every period end, before the statements are produced, and they change the numbers those statements report. Closing entries happen once, at year end, after everything is adjusted — they zero out revenue and expense accounts and roll the year's profit into Retained Earnings. Our guide to year-end closing entries covers that second step in full.

When in the month-end close do you post them?

After the bank accounts are reconciled and receivables and payables are reviewed, but before you generate the financial statements — you can't adjust books you haven't finished entering, and there's no point reading statements you haven't adjusted. That's step five of eight in our month-end close checklist.

The Five Mistakes That Cause Most of the Damage

1. Posting them to cash. The single fastest way to spot a bad adjusting entry. Cash is recorded when it moves; adjustments only reallocate revenue and expense.
2. Dating them in the wrong period. An adjustment dated the 1st instead of the 30th lands the amount in the month you were trying to keep it out of.
3. Accruing and then forgetting to reverse. The accrual stays, the real bill arrives, and the expense is counted twice — usually noticed when a liability account grows and never drains.
4. Setting up a schedule and abandoning it. Prepaids and deferred revenue need an entry every month, not just the month they were created.
5. Writing them with no description. Six months later nobody can tell what "JE-0114" was for. Say what it is, what period it covers, and how you calculated the number.

How BizBooks Pro Handles Adjusting Journal Entries

Every entry above is a plain double-entry journal, and BizBooks Pro treats it as one: pick the accounts, enter the debits and credits, date it to the period end, and add a description that will still make sense next year. Because the ledger is genuine double-entry bookkeeping, the entry has to balance before it will post, and the moment it does, the income statement, balance sheet and trial balance all move together.

Three things make the routine less manual. Journal entries can be memorized and recurred, so a monthly prepaid amortization or depreciation entry posts on a schedule instead of relying on you remembering. Accruals can be auto-reversed into the next period, which removes the most common double-counting mistake. And because you can run reports on a cash or accrual basis without re-entering anything, you get the management view you want and the GAAP-compliant view your accountant expects — from the same set of books, on your own computer.

The Bottom Line

Adjusting journal entries are not an accountant's ritual — they're the mechanism that makes a monthly income statement mean something. Five patterns cover nearly all of them: accrue what you've used, accrue what you've earned, amortize what you prepaid, release what you collected early, and depreciate what you're wearing out. Each one debits or credits a single income statement account against a single balance sheet account, and none of them goes anywhere near cash.

Start with the two that bite hardest — accrued expenses and unbilled revenue — and add the schedules from there. Within a quarter you'll have monthly numbers you can actually compare to each other, which is the entire point.

Frequently Asked Questions

What are adjusting journal entries?

Adjusting journal entries are entries posted on the last day of an accounting period to move revenue and expenses into the period they actually belong to. They fix the gap between when cash moves and when the economic activity happens, which is the whole basis of accrual accounting.

What are the five types of adjusting journal entries?

Accrued expenses (incurred but not yet billed), accrued revenue (earned but not yet invoiced), prepaid expenses (paid up front and used over time), deferred or unearned revenue (collected up front and earned over time), and depreciation or amortization (spreading an asset's cost across its useful life).

Do adjusting journal entries ever touch the cash account?

No. A correctly written adjusting entry never debits or credits cash. Cash movement is recorded when it happens; the adjusting entry only reallocates revenue and expense across periods. If your entry hits cash, it is a correction or a missing transaction, not an adjustment.

What is the difference between adjusting entries and closing entries?

Adjusting entries change the amounts reported for a period and are posted before the financial statements are produced, at every period end. Closing entries come afterward, at year end only, and zero out revenue and expense accounts by moving the year's profit into Retained Earnings.

Do cash-basis businesses need adjusting journal entries?

Mostly no. On a pure cash basis you record income and expenses only when money moves, so accruals, prepaids and deferred revenue do not apply. Depreciation is the common exception, since fixed assets are still capitalized and written down over time for tax purposes.

Should accrual adjusting entries be reversed the next month?

Accrued expense and accrued revenue entries are usually reversed on the first day of the following period, so that when the real bill or invoice arrives it can be recorded normally without double-counting. Prepaid amortization, deferred revenue releases and depreciation are not reversed.

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