Adjusting journal entries: Types, examples, and how to record

Adjusting entries make sure your financial statements match the reality of your operations. They update your records for income you earned but haven't received, expenses you have incurred but haven't paid, and other timing differences that can distort your financial picture.

If you use accrual accounting, these entries are not optional. They are essential for matching revenue and expenses to the right period, giving you a clear view of performance.

Without them, your reports are incomplete. You risk making decisions based on inaccurate data, falling out of compliance, or raising red flags during an audit.

What are adjusting journal entries?

Adjusting journal entries are end-of-period updates you make to your accounting records to reflect income earned or expenses incurred that haven't yet been captured. They ensure your financial statements accurately show your business activity for the period.

Adjusting journal entries exist because your day-to-day double-entry accounting does not always align with when revenue is earned or costs are actually used. You might deliver a service this month and get paid next month. You might pay upfront for insurance that covers the next six months. Without adjusting entries, your reports would only reflect cash movement and not the financial reality behind it.

Under accrual accounting, financial statements must match income and expenses to the period they relate to, not when money enters or leaves your account. Adjusting entries make this possible by recording these timing differences at the close of each reporting period.

These entries update the general ledger so that every amount reported on the income statement and balance sheet reflects what truly occurred during the period. These updates do not involve new transactions. They revise existing account balances to make sure revenue is recognized when earned and expenses are recognized when incurred.

Adjusting entries vs. correcting and closing entries

Adjusting entries, correcting entries, and closing entries serve different purposes in the accounting cycle. Knowing which to apply, and when, prevents misclassified journal entries.

Adjusting entries handle timing differences at period end. They record accruals and deferrals so your financial statements reflect revenue earned and expenses incurred, regardless of when cash changes hands.

Correcting entries fix outright recording errors, like posting to the wrong account or entering the wrong amount. You can post correcting entries at any point during the period, not just at the close.

Closing entries zero out temporary accounts (revenue, expenses, and dividends) so the books are ready for the next reporting period. They transfer net income into retained earnings and reset the income statement accounts to zero.

Types of adjusting journal entries

Not all financial activity fits neatly into your day-to-day bookkeeping. That's why there are different types of adjusting journal entries. You use these entries to align your financial statements with what actually occurred during the period.

The type of adjusting entry you use depends on the nature of the transaction and the accounting standards you follow. Your accountant, controller, or finance lead makes that decision based on factors like revenue timing, contract terms, and asset usage.

The core types below align with GAAP and IFRS accrual accounting requirements.

Accrued revenues

Accrued revenue is income you have earned but have not yet billed or collected. You record it to make sure your financial statements reflect the work you completed within the reporting period, even if the invoice goes out later.

Let's say you finished a consulting project on March 30 but plan to invoice the client in April. That revenue still belongs in March. If you wait to record it until April, your March income will be understated, and your financials will not reflect what actually happened.

The accrued revenue journal entry for this example:

You'll encounter accrued revenue most often if you work in services, project work, or long-term contracts. It also comes up when you've met your performance obligations before billing, which is common in SaaS, legal services, and engineering.

This entry increases your revenue on the income statement and creates an asset, usually labeled as "accrued receivables" or "unbilled revenue" on the balance sheet. You clear that asset once the invoice is sent and payment is received.

Accrued revenue adjustments help you apply the matching principle, which is a core rule under GAAP and IFRS. They also support revenue recognition standards like ASC 606 and IFRS 15, which both require revenue to be recorded when it's earned and not when the payment arrives.

When you earn revenue but haven't invoiced yet, it's easy to miss that in your records. Ramp gives you real-time visibility into unbilled transactions by syncing with your systems and surfacing revenue that hasn't been matched to payments. This helps your team catch and record earned revenue through accurate adjustments before close.

Accrued expenses

Accrued expenses are costs you've incurred during a reporting period but have not recorded yet because the bill has not arrived or payment has not been made. You recognize them through adjusting entries to make sure your financial statements reflect the full cost of doing business in that period.

If your team finishes a contractor project in June but the invoice comes in July, the expense will still be in June. Recording it in the right month prevents overstating your profits and keeps your finances aligned with the actual work performed.

This accrued expenses journal entry records the wages owed:

Unpaid wages, interest, utilities, and professional services are common accrued expenses. For a detailed walkthrough of how to record wage-related entries, see payroll journal entries. These costs build up over time, even if you haven't received a formal invoice by the period's end.

An accrued expense entry increases your expenses on the income statement and creates a liability, usually labeled as "accrued liabilities" or "accrued expenses" on the balance sheet. You remove the liability once you receive and pay the invoice.

GAAP and IFRS require you to record expenses when you incur them, not when you pay them. This helps you apply the matching principle so that expenses line up with the revenue they support.

Deferred revenues

Deferred revenue is money you've received for goods or services you haven't delivered yet. You record it as a liability, not revenue until you complete your part of the agreement. This keeps your income statement clean and your balance sheet accurate.

If a customer pays you for a 12-month subscription in advance, you can't recognize that full amount upfront. You recognize revenue month by month as the service is delivered. Until then, the unearned portion sits on your balance sheet as deferred revenue.

This type of adjustment is common in SaaS, insurance, and any business that gets paid before providing the full service. It's also one of the most misunderstood areas in revenue recognition. Contract liabilities under ASC 606 and IFRS 15 are broader than deferred revenue: they include any obligation where you've received consideration but haven't transferred control of the good or service.

To recognize one month of a prepaid subscription, you'd record this deferred revenue journal entry:

Deferred revenue entries reduce your reported income in the current period and shift the balance to a liability account. As you meet your performance obligations, you move the appropriate amount from the balance sheet to revenue on your income statement.

GAAP and IFRS both require this treatment under revenue recognition standards like ASC 606 and IFRS 15. These rules emphasize that revenue must reflect performance, not payment timing.

Prepaid expenses

Prepaid expenses are payments you make in advance for goods or services that benefit future periods. Until those benefits are used, the cost sits on your balance sheet as an asset. You recognize the expense gradually, based on how much of the service you have consumed.

Common examples include insurance, rent, or software subscriptions. If you pay for a 12-month policy upfront, you haven't "spent" it all in the first month. Only a portion applies to each period. Adjusting entries move that portion from the asset account to the expense account as time passes.

This prepaid expenses journal entry recognizes one month of a 12-month insurance policy:

This approach prevents overstating expenses in the month you made the payment. It spreads the cost in a way that matches how your business actually uses the service.

Prepaid expense adjustments help you follow the matching principle, which requires expenses to align with the period they support. Under both GAAP and IFRS, this is a core part of accrual accounting.

Without this entry, your reports may show inflated costs in one month and understated expenses in the following months. That skews your profitability and can lead to poor decisions. To reduce manual effort and avoid mistakes, 66% of accounting teams now prefer automating these recurring expenses.

Depreciation and amortization

Depreciation and amortization entries let you spread the cost of long-term assets over the periods they benefit. Instead of expensing the full amount when you purchase equipment, software, or intellectual property, you recognize a portion of the cost each period.

This approach aligns with the matching principle. It ensures that your financial statements reflect how assets lose value as they're used, not just when you pay for them.

Depreciation applies to physical assets like machinery, vehicles, and furniture. Amortization applies to intangible assets like software licenses, patents, and trademarks. Both follow a schedule based on the asset's useful life, and you record the adjustment consistently each period.

These entries reduce the asset's value on your balance sheet and increase your expenses on the income statement. They do not impact cash flow but do affect profitability and tax calculations.

Accounting standards require businesses to review asset values regularly. If the asset is no longer useful or has dropped in value, you may also need to record an impairment.

For recurring adjustments like depreciation or amortization, Ramp allows you to create custom accounting rules. You can set up recurring schedules that post entries over the asset's useful life, eliminating the need to re-enter the same data every month.

Inventory adjustments and write-downs

Inventory adjustments and write-downs help you keep your books aligned with the actual value of the goods you have on hand. These entries correct differences between what's recorded, physically available, or still sellable.

If an inventory is lost, damaged, expired, or obsolete, it no longer holds its original value. You need to reflect that loss in your finances by adjusting the inventory balance and recording an expense. This ensures your cost of goods sold (COGS) and gross profit remain accurate.

Inventory write-downs reduce the carrying value of the stock to its net realizable value, which is the amount you expect to recover through the sale. If that value drops below the original cost, accounting rules require you to recognize the difference as a loss.

An inventory write-down entry looks like this:

These issues are typically discovered during cycle counts or full physical inventory checks, but they can also result from demand shifts, product recalls, or supply chain delays.

These entries affect both the balance sheet and income statement. They lower inventory as an asset and increase expenses, which reduces net income.

Bad debt expense

Bad debt expense accounts for the money you are unlikely to collect from customers. When an invoice goes unpaid for too long, you record an adjusting entry to reflect the loss. This keeps your income statement accurate and realistic in your accounts receivable.

Even if you haven't written off the debt yet, you still estimate the portion of receivables that will not be paid. The conservatism principle requires you to recognize potential losses as soon as they become likely.

You typically calculate bad debt using either a percentage of sales or an aging analysis of receivables. The entry reduces accounts receivable on your balance sheet and increases expenses on your income statement.

The journal entry to record bad debt expense:

In the first quarter of 2023, the four largest U.S. banks wrote off a combined $3.4 billion in bad consumer loans, a 73% increase from the previous year.

Bad debt expense also supports compliance with standards like ASC 326 (Current Expected Credit Losses), which requires businesses to estimate future credit losses and not just wait until they happen.

How adjusting entries affect financial statements

Adjusting entries directly change both the income statement and the balance sheet. Without them, both statements would misrepresent your financial position for the period.

On the income statement, adjusting entries ensure that reported revenue and expenses match the period they belong to. Accruing unpaid wages or recognizing earned but unbilled revenue shifts these amounts into the correct reporting window, which directly affects your net income. If you skip these adjustments, you'll overstate or understate profit for the period.

On the balance sheet, adjusting entries update asset and liability accounts to reflect current obligations and resources. Accrued expenses create liabilities (like wages payable), while accrued revenues create assets (like accounts receivable). Prepaid expense adjustments reduce asset balances as you consume the prepaid service, and deferred revenue entries shift liabilities to revenue as you deliver on your obligations.

They're connected: every adjusting entry touches at least one income statement account and one balance sheet account. Getting them right is what makes your financial reporting reliable under accrual accounting.

How to record adjusting journal entries

Adjusting journal entries are made at the end of each reporting period, usually monthly, quarterly, or annually. For most companies, these entries are part of the month-end close process and reviewed before financials are finalized.

The actual time it takes to prepare each entry can range from a few minutes to several hours. It depends on how complex the adjustment is, how much supporting data you need, and whether you use manual or automated processes. Entries tied to depreciation or prepaid expenses are often quick. Others, like revenue recognition or contract liabilities, may take longer and require cross-team input.

Step 1: Review your trial balance

Run your unadjusted trial balance to get a snapshot of all account balances before adjustments. Focus on revenue, expenses, and balance sheet accounts tied to timing differences.

Step 2: Identify what needs adjusting

Look for income earned but not yet billed, expenses incurred but not yet paid, and assets that need depreciation. Ramp helps flag these transactions by using AI to detect timing issues and gaps in categorization.

Step 3: Calculate the correct amount

Use supporting documentation like invoices, payroll summaries, or usage schedules to determine how much should be recorded. For a prepaid annual software fee, divide the total over 12 months and record only the current period's portion.

Step 4: Record the journal entry

Enter the entry in your accounting system using standard debit and credit rules, ensuring it impacts at least one balance sheet and one income statement account. Verify the entry balances before posting.

Step 5: Update your trial balance

Run an updated trial balance to confirm all account balances reflect the adjustments. If any account looks off, go back to the source entry and verify.

Step 6: Document each entry

Attach supporting evidence for every entry, whether an invoice, contract, or calculation worksheet. This protects you during audits and speeds up future close cycles.

Common mistakes with adjusting journal entries

Even experienced accounting teams make errors with adjusting entries. Watch for these during your close process.

• Forgetting to reverse accruals: If you don't reverse the prior period's accrual when the actual transaction posts, you double-count the expense or revenue. This inflates your totals and creates variances that are difficult to trace after the fact.
• Double-counting deferred revenue: Recording revenue when cash arrives and again when the service is delivered is one of the most frequent mistakes with unearned revenue adjusting entries. The result is overstated income for the period.
• Using the wrong period: Posting the adjustment to the current month when the expense or revenue belongs to the prior period throws off both periods. This is especially common with invoices that arrive late or span multiple months.
• Skipping documentation: Adjusting entries without supporting evidence create audit risk. When you can't explain why an adjustment was made, it's harder to defend the entry during reviews or external audits.
• Not reconciling to the trial balance: Posting adjustments without verifying that the adjusting trial balance still balances afterward can introduce errors that cascade into your financial statements. Always run an updated trial balance after posting.

Automate adjusting entries with Ramp's Accounting Agent

Adjusting entries are critical for accurate financials, but they're also time-consuming and error-prone when handled manually. You need to track prepaid expenses, accrue for unbilled costs, and ensure every transaction lands in the right period.

Ramp's accounting automation software handles adjusting entries automatically, so your books stay accurate without the manual work. The platform identifies transactions that need accruals or amortization, posts the entries to your enterprise resource planning (ERP) system, and reverses them in the next period based on your accounting policies and transaction context.

Here's how Ramp automates adjusting entries:

• Auto-post accruals: Ramp detects when expenses need to be accrued (like when a receipt is missing or an invoice hasn't arrived) and posts the entry automatically so costs land in the right period
• Auto-reverse accruals: When the missing context arrives, Ramp reverses the accrual and posts the actual transaction, eliminating duplicate entries and manual cleanup
• Amortize automatically: Ramp spreads prepaid expenses and multi-period costs across the right accounting periods based on your rules, so you don't need to track and post manual journal entries every month
• Maintain full audit trails: Every automated entry includes supporting documentation, approval history, and a clear explanation of why the adjustment was made, so your books are always audit-ready

Try an interactive demo about how Ramp helps finance teams close their books 3x faster with automated adjusting entries and AI-powered accounting.