Keeping financial records accurate is more than just logging sales and expenses. At times, businesses need to correct or update what was recorded earlier. That’s where adjusting entries come in. This guide answers the most common questions about adjusting entries, explains why they matter, and shows how they connect to professional bookkeeping services.
What Are Adjusting Entries in Bookkeeping?
Adjusting entries are journal entries made at the end of an accounting period to update accounts that are incomplete, misstated, or recorded in the wrong period.
Instead of erasing the original transaction, an adjusting entry is added to “adjust” the books so income and expenses line up correctly with the time they actually occurred. This ensures financial statements reflect the real position of the business.
Why Do Businesses Need Adjusting Entries?
Without adjusting entries, financial statements can be misleading. For example:
- You may record a customer’s invoice in December, but they pay in January. Without an adjustment, December shows too much income.
- You prepay rent in advance. Without adjusting, the expense may appear all at once instead of spread over the months it covers.
Accurate adjustments support better decision-making, proper tax reporting, and compliance with accounting principles.
How Do Adjusting Entries Work in Practice?
Here’s the process:
- Review transactions at period end.
- Identify timing mismatches—income earned but not recorded, or expenses incurred but unpaid.
- Create adjusting entries to correct these mismatches.
- Post adjustments so financial statements are aligned.
These entries are essential for businesses using accrual accounting. They may not always be needed in strict cash accounting but are still useful for reporting accuracy.
What Types of Adjusting Entries Exist?
Adjusting entries generally fall into five categories:
- Accrued Revenues – Income earned but not yet received (e.g., services provided but not invoiced).
- Accrued Expenses – Costs incurred but unpaid (e.g., employee wages owed at month end).
- Deferred Revenues – Income received in advance but not yet earned (e.g., prepaid subscriptions).
- Deferred Expenses – Payments made ahead of time that need to be spread across periods (e.g., insurance premiums).
- Depreciation and Amortization – Allocation of asset costs over time.
These adjustments transform raw transaction data into a more accurate financial picture.
Are Adjusting Entries the Same as Corrections?
Not exactly. Corrections fix outright mistakes (like a typo in a number). Adjusting entries, on the other hand, are part of normal bookkeeping—they allocate revenues and expenses correctly across time.
Both improve accuracy, but adjusting entries specifically align with accrual accounting rules and the matching principle.
What Is the Matching Principle and Why Does It Matter?
The matching principle in accounting requires that expenses be recorded in the same period as the revenues they help generate.
Example: If you provide a service in December but pay employee wages in January, an adjusting entry ensures December shows both the income and the wage expense. This keeps profits realistic and prevents misleading spikes or dips.
Can Small Businesses Handle Adjusting Entries in Excel?
Yes, but carefully. Small businesses using Excel templates can add adjusting entries manually at the end. However, there are risks:
- Formulas may break if not updated correctly.
- Manual inputs increase chances of errors.
- Complex adjustments like depreciation are hard to manage without professional guidance.
This is where bookkeeping services add value, ensuring accuracy and saving owners time.
How Do Adjusting Entries Connect to Bookkeeping Services?
Bookkeeping services often include:
- Reviewing transactions monthly or quarterly.
- Identifying where adjustments are needed.
- Posting adjusting entries so statements match reality.
- Preparing accurate year-end reports for tax filings.
For businesses managing growth, outsourcing adjustments ensures compliance and prevents costly reporting errors.
What Are Common Examples of Adjusting Entries?
- Accrued Salaries: $5,000 wages earned in December but paid in January.
- Interest Expense: Loan interest accumulated but unpaid at period end.
- Prepaid Insurance: $12,000 annual premium recorded as $1,000 per month instead of one lump sum.
- Unearned Revenue: Advance payments for services to be delivered later.
- Depreciation: Adjusting equipment costs over its useful life.
These examples show how adjustments prevent distorted financial results.
How Often Should Adjusting Entries Be Made?
Most businesses make adjusting entries monthly or quarterly, depending on reporting needs. At a minimum, they must be done at year-end before preparing financial statements or filing taxes.
What Happens If Adjusting Entries Are Ignored?
Skipping adjustments can cause:
- Overstated or understated profits.
- Inaccurate tax reporting.
- Difficulty securing loans or investment due to misleading statements.
- Poor management decisions based on faulty data.
Essentially, ignoring adjustments means running your business on incomplete information.
How Do Adjusting Entries Differ in Cash vs Accrual Accounting?
- Cash accounting: Transactions are recorded only when cash changes hands. Adjusting entries is less common.
- Accrual accounting: Revenues and expenses are recorded when earned or incurred. Adjusting entries are essential for accuracy.
Most growing businesses adopt accrual accounting because it provides a clearer financial picture, especially for lenders and investors.
Can Software Automate Adjusting Entries?
Yes. Modern tools like QuickBooks and Xero can handle recurring adjustments—such as monthly depreciation or prepaid expenses. Still, a professional review ensures these automations are set up correctly and adjusted for exceptions.
What Role Do Accountants Play in Adjusting Entries?
Accountants go beyond data entry. They:
- Review financial statements for accuracy.
- Post complex adjustments like depreciation schedules.
- Ensure compliance with GAAP or IFRS.
- Translate adjustments into insights for decision-making.
For many small businesses, combining Excel tracking with professional bookkeeping services offers the best balance of affordability and accuracy.
Why Choose Smart Accountants for Adjusting Entries and Bookkeeping Services?
At Smart Accountants, we help businesses simplify financial reporting. Our services include:
- Reviewing your books monthly for missing adjustments.
- Posting accurate adjusting entries for compliance.
- Building Excel templates with adjustment-ready features.
- Offering ongoing support as your business grows.
With us, you get the confidence that your financial statements always reflect reality, no surprises at tax season, no missteps in reporting.
FAQs
Do all businesses need adjusting entries?
Businesses using accrual accounting do. Cash-only businesses may need them less often but still benefit from reporting accuracy.
Can adjusting entries fix mistakes?
They’re more about timing than errors. Mistakes require correcting entries. Adjustments align accounts with the right period.
Are adjusting entries difficult to learn?
Not really. The concept is straightforward, though some entries (like depreciation) need accounting knowledge.
How do adjusting entries affect taxes?
They ensure income and expenses are properly matched, which leads to correct taxable income.
Can I outsource adjusting entries separately?
Yes. Many bookkeeping services, including Smart Accountants, offer standalone adjustment reviews or year-end closing support.
Final Thoughts
Adjusting entries may sound technical, but they’re simply a way of making sure your books tell the truth about your business. They align revenues and expenses with the right period, support compliance, and give you clarity for better decisions.If you want peace of mind, Smart Accountants can handle adjustments for you, whether you’re using Excel, QuickBooks, or another system. With expert bookkeeping services, your financial statements will always be complete, accurate, and ready for whatever comes next.
