- Adjusting entries align income and expenses with the period they belong to, which is the whole point of accrual accounting and the matching principle.
- There are five core types: accrued revenues, accrued expenses, deferred (unearned) revenues, prepaid expenses, and depreciation.
- No adjusting entry ever debits or credits cash because cash movement is recorded separately when it happens.
- Businesses with average annual gross receipts under about $32 million for 2026 can often use the cash method, but accrual books still need adjusting entries to be accurate.
- Missing entries can inflate or hide profit, leading to overpaid estimated taxes or a nasty year-end surprise.
Adjusting entries are journal entries you record at the end of an accounting period to bring your books in line with reality. They capture revenue you have earned but not yet billed, expenses you have incurred but not yet paid, and the slice of prepaid or deferred items that actually belongs to the period.
Every adjusting entry touches at least one income statement account and one balance sheet account, and none of them ever involve cash.
That last point trips up a lot of owners. Adjusting entries are not about moving money. They are about timing: making sure income and expenses land in the month they truly belong to, so your reports reflect what your business actually did. Get them right and your profit number is trustworthy.
Skip them and your books drift away from the truth, which throws off everything downstream in the Financial Statements guide that these numbers feed into.
If period-end adjustments feel like more than you want to manage on top of running the business, this is exactly the kind of work you can hand off.
Letting our team handle your books through professional monthly bookkeeping means accruals, deferrals, and depreciation get posted correctly every close, without you touching a journal.
Need help with Bookkeeping?
Book a free consultation with a BooksCure Bookkeeping expert.
New business owner? Learn about our free consultation.
Photo: A small-business owner reviews her monthly numbers on a screen in a bright office
What Adjusting Entries Are
Adjusting entries exist because of accrual accounting. Under the accrual basis, you record revenue when you earn it and expenses when you incur them, regardless of when cash changes hands. That is different from cash-basis accounting, where you record income only when the money arrives and expenses only when you pay them.
The rule that drives adjusting entries is the matching principle: expenses should be reported in the same period as the revenue they helped produce.
Sitting alongside it is the revenue recognition principle, formalized in the FASB revenue recognition standard (ASC 606), which says you recognize revenue as you deliver the goods or service, not simply when a customer pays.
During the month, your bookkeeping software records transactions as they occur: invoices sent, bills paid, deposits made. But some economic activity does not generate a transaction on its own. Interest quietly accrues. A prepaid insurance policy slowly gets used up. Equipment wears down a little every day.
Adjusting entries are how you record that quiet activity before you close the books.
In practice, they are posted to the General Ledger as the last step before you run reports.
I have spent more than 15 years and 1,200-plus monthly closes doing exactly this, and I can tell you the difference between a set of books that gets adjusted and one that does not is the difference between numbers you can plan around and numbers you have to apologize for.
The first thing I look for in a new client's books is whether anyone was doing adjusting entries. Nine times out of ten, when the monthly profit swings wildly for no reason, it is because nobody was accruing or deferring anything. The transactions were fine. The timing was a mess.
Why Adjusting Entries Matter
The payoff is an accurate profit picture. Without adjusting entries, your income statement shows whatever happened to hit the bank that month, which is noise, not signal. A big customer prepayment can make a slow month look like a blockbuster. A quarterly insurance bill can make a normal month look like a disaster.
Adjusting entries smooth that out. They also protect the integrity of your other core reports. Accrued expenses show up as liabilities on your Balance Sheet.
Recognized revenue flows through to your Profit and Loss Statement.
And because net income rolls into retained earnings, sloppy adjustments distort your Statement of Equity too. One missing entry ripples across the entire set.
Worth noting: accruals and deferrals change your reported profit without moving any cash, which is exactly why a healthy-looking income statement can sit next to a tight bank balance.
Reconciling that gap is the job of your Cash Flow Statement, and it only works when the underlying adjustments are done right.
There is a tax angle as well. If your books overstate profit because you never deferred a customer's annual prepayment, you may end up paying estimated quarterly taxes on income you have not actually earned yet.
The SBA points owners toward clean, consistent records precisely because those records drive tax, lending, and planning decisions.
The Five Types of Adjusting Entries
There are five standard categories. Learn these and you can handle almost every adjustment a small business will ever need.
Accrued Revenues
Accrued revenue is money you have earned but not yet recorded or billed. Think of a consultant who finished 20 hours of work in June but will not invoice until July. The revenue was earned in June, so a June adjusting entry debits Accounts Receivable and credits Revenue. When the cash later arrives, you reduce the receivable, not revenue.
Accrued Expenses
Accrued expenses are costs you have incurred but not yet paid. Wages your team earned in the last week of the month but that get paid in the first week of the next month are the classic example. You debit Wages Expense and credit Wages Payable so the cost lands in the period the work happened. Interest on a loan works the same way.
Deferred Revenues
Deferred revenue, also called unearned revenue, is cash you have received before you have earned it. A gym that sells a $1,200 annual membership up front has not earned $1,200 in January. It has earned $100 and owes the customer 11 more months of access.
The upfront cash is recorded as a liability, then an adjusting entry moves $100 to revenue each month as it is earned.
Need help with Bookkeeping?
Book a free consultation with a BooksCure Bookkeeping expert.
New business owner? Learn about our free consultation.
Prepaid Expenses
Prepaid expenses are the mirror image: cash you have paid before receiving the benefit. Pay $2,400 for a 12-month insurance policy and you have an asset, not an expense. Each month an adjusting entry moves $200 from Prepaid Insurance to Insurance Expense. Rent paid in advance and annual software subscriptions follow the same pattern.
Depreciation
Depreciation spreads the cost of a long-lived asset over its useful life. Buy a $6,000 piece of equipment expected to last five years and you do not expense $6,000 at once. Instead a monthly adjusting entry recognizes $100 of Depreciation Expense and adds to Accumulated Depreciation.
Investopedia notes this is one of the most common recurring adjustments on a business's books.
| Type | Cash timing | Debit | Credit | Statement effect |
| Accrued revenue | Cash comes later | Accounts Receivable | Revenue | Raises income and assets |
| Accrued expense | Cash paid later | Expense | Payable (liability) | Raises expense and liabilities |
| Deferred revenue | Cash received first | Unearned Revenue | Revenue | Raises income, lowers liability |
| Prepaid expense | Cash paid first | Expense | Prepaid asset | Raises expense, lowers asset |
| Depreciation | No cash | Depreciation Expense | Accumulated Depreciation | Raises expense, lowers net asset |
Photo: A closed ledger, calculator, and plant on a tidy desk ready for period-end adjustments
Adjusting Entry Examples
Numbers make this concrete. Say a small marketing agency reaches June 30 and needs to close its books. Here are the adjustments it would post before running reports.
| Situation | Adjusting entry | Amount |
| Earned $4,000 of project work, not yet invoiced | Debit Accounts Receivable, credit Revenue | $4,000 |
| Owes staff for the last 4 days of June, paid July 5 | Debit Wages Expense, credit Wages Payable | $2,800 |
| Client paid $9,000 for a 3-month retainer on June 1 | Debit Unearned Revenue, credit Revenue | $3,000 |
| Paid $1,800 for a 12-month software plan on Jan 1 | Debit Software Expense, credit Prepaid Software | $150 |
| $12,000 of equipment, 5-year life, monthly | Debit Depreciation Expense, credit Accumulated Depreciation | $200 |
Before these entries, the agency's June profit was distorted in both directions: it was missing $4,000 of earned revenue and $2,800 of real wage cost, while overstating revenue by counting the full retainer. After adjusting, its June income statement finally reflects what the agency actually earned and spent that month.
That is the number an owner can price, hire, and plan against.
Photo: A quiet cafe corner where an owner steps away to think through the books
Owners always ask which entries matter most. I tell them the two that bite hardest are unearned revenue and accrued payroll. Miss the first and you look richer than you are. Miss the second and your labor cost looks artificially low, so your margins lie to you.
Accrual vs Cash Basis and When Entries Apply
Adjusting entries are a feature of accrual accounting, so it helps to know which method your business is on. The IRS lets many small businesses choose the cash method, which needs fewer adjustments.
Under the Section 448(c) gross receipts test, a business generally qualifies for the cash method if its average annual gross receipts for the prior three years stay under an inflation-adjusted threshold, which is about $32 million for the 2026 tax year.
The base figure was set at $25 million by the Tax Cuts and Jobs Act and is indexed each year.
Even so, plenty of small businesses keep accrual books internally because the numbers are more meaningful, then file taxes on the cash method.
The details of choosing and changing methods are laid out in IRS Publication 538, and the Journal of Accountancy covers the small-business method rules in depth.
The takeaway: if you keep accrual books, adjusting entries are mandatory at every close. If you are strictly cash basis for both books and taxes, you will make far fewer, though depreciation and a handful of others may still apply.
Need help with Bookkeeping?
Book a free consultation with a BooksCure Bookkeeping expert.
New business owner? Learn about our free consultation.
Photo: A bookkeeper works carefully through end-of-month figures by hand
How Adjusting Entries Fit the Close
Adjusting entries sit near the end of the accounting cycle. The typical order is: record daily transactions, reconcile your bank and credit accounts, post adjusting entries, then produce financial statements. Once statements are done, closing entries reset the temporary income and expense accounts for the next period.
This is skilled work, and it is a large part of what the roughly 1.6 million bookkeeping, accounting, and auditing clerks in the United States do, according to the Bureau of Labor Statistics, which reports a median annual wage of $49,210 as of May 2024.
Doing it consistently, month after month, is what separates books you can trust from books you have to rebuild.
The habit that saves clients the most money is running the same short list of adjusting entries every single month. Prepaids, payroll accrual, depreciation, unearned revenue. Once it is a checklist instead of a scramble, the close takes an hour instead of a weekend, and nothing slips through.
Common Mistakes to Avoid
The most frequent error is not making adjusting entries at all, which leaves books on a de facto cash basis while owners believe they are accrual. Close behind is forgetting to reverse accruals, so a wage accrual gets double-counted when the actual payroll runs the next month.
Two more show up constantly. Owners expense an entire annual prepayment in one month instead of spreading it, and they book customer prepayments as revenue on day one instead of deferring them. Both distort profit badly.
Consider Renata, who runs a boutique Pilates studio in Denver. She sold annual memberships for $1,200 each and booked the full amount as revenue the day each member signed up. Her January looked wildly profitable, then February and March looked like losses, and she nearly overpaid her Q1 estimated taxes on that phantom January income.
Once we set up a deferred revenue schedule that recognized $100 per member each month, her monthly profit steadied, and she avoided roughly $3,400 in unnecessary estimated tax for the quarter. The activity in her business never changed. Only the timing did.
Renata is not unusual. Across the bookkeepers in our BooksCure network, we see the same pattern in a large share of the messy books we clean up: prepayments booked as instant revenue. It feels good in the moment and it wrecks every report until someone fixes it.
Photo: A professional catches up on the monthly close in a shared workspace
Conclusion
Adjusting entries are the quiet step that makes your financial statements honest. They move revenue and expenses into the period they belong to, so the profit you see is the profit you actually made.
Master the five types, run them on a consistent monthly checklist, and reconcile before you post, and your books will hold up to scrutiny from you, your lender, and the IRS.
If the monthly rhythm of accruals, deferrals, and depreciation is more than you want to own yourself, that is a normal thing to delegate. Clean, adjusted books are the foundation every other financial decision rests on, and getting them right every close is worth the effort or the help.
Disclaimer
Figures are general US estimates for 2026 and vary by entity type, transaction volume, state, and complexity. This article is educational and is not tax, legal, or investment advice; consult a qualified tax professional (such as an IRS Enrolled Agent) about your situation.
BooksCure provides bookkeeping, tax preparation and filing, payroll, and advisory services; it is not a CPA firm and does not provide audit, attest, or assurance services.
Sources & References
- IRS: Publication 538, Accounting Periods and Methods
- IRS: FAQs Regarding the Section 448(c) Gross Receipts Test
- FASB: Accounting Standards Updates and Revenue Recognition (ASC 606)
- U.S. Bureau of Labor Statistics: Bookkeeping, Accounting, and Auditing Clerks
- U.S. Small Business Administration: Manage Your Finances
- Journal of Accountancy: Accounting Methods
- Investopedia: Adjusting Journal Entry
- SCORE: Financial Statements and Bookkeeping Resources
- AICPA: Revenue Recognition Resources
Marcus is a lead bookkeeper with over 15 years of experience closing the books for hundreds of small businesses across Texas and beyond. He specializes in monthly bookkeeping, bank and card reconciliation, and setting up QuickBooks and Xero so they run without friction. Marcus writes for BooksCure to help owners build the day-to-day habits that keep their records tidy and their reports trustworthy.
Tom is a controller with more than 25 years of experience running month-end close and financial reporting for growing companies in the Upper Midwest. He specializes in internal controls, accrual accounting, and cleaning up books that have drifted off track. As a Certified Management Accountant, Tom reviews BooksCure reporting and controls content to make sure it reflects how the work is really done.
