Adjusting Entries: 4 Types with Simple Examples
Adjusting entries are journal entries recorded at the end of an accounting period so revenues and expenses land in the period they were earned or incurred. There are four main types: prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. Estimates like depreciation and bad debts are also recorded as adjustments.
The cash side of the transaction may have happened earlier, may happen later, or may not be involved at all, as with depreciation. Each routine adjustment usually changes one income statement account and one balance sheet account, and it does not touch Cash.
Watch Professor Farhat: In this lesson, Professor Farhat walks through all four types of adjusting entries with examples. Watch it first, then use the five-step process below to practice on your own.
Why are adjusting entries necessary?
A company can record every cash receipt and payment correctly and still report incomplete income. Employees may have earned unpaid wages, customers may have received unbilled services, and insurance coverage may have expired. These events must enter the appropriate period before financial statements are prepared. Need a quick refresher on assets, liabilities, revenues, and expenses? See our guide to the elements of financial statements.
The Financial Accounting Standards Board (FASB) explains the distinction between economic activity and cash timing in its Conceptual Framework, paragraph OB17. The framework supplies conceptual context; it is not a substitute for the applicable U.S. generally accepted accounting principles (GAAP).
What are the four types of adjusting entries?
The fastest way to sort an adjustment is to ask one question: did cash move before or after the activity?
If cash moved first, it is a deferral. The amount is already on the balance sheet as an asset (such as Prepaid Insurance) or a liability (such as Unearned Revenue), and the adjustment moves the used or earned part to the income statement.
If the activity happened first, it is an accrual. Revenue was earned or an expense was incurred, but nothing has been recorded yet, so the adjustment records it now. The cash usually follows in a later period.
| Category | Period-end fact | Typical adjusting entry |
|---|---|---|
| Prepaid expense | A recorded benefit has been used | Debit Expense; credit Prepaid Asset |
| Unearned revenue | An advance has now been earned | Debit Unearned Revenue; credit Revenue |
| Accrued revenue | Revenue earned but not yet recorded | Debit Receivable; credit Revenue |
| Accrued expense | Expense incurred but not yet recorded | Debit Expense; credit Payable |
These patterns assume prepayments were initially recorded in balance-sheet accounts. Read the starting entry before applying a memorized rule. For detailed calculations, continue to deferral adjusting entries or accrual adjusting entries.
Types of Adjusting Entries: Interactive Matching Exercise
In this four-category model, prepaid expenses and unearned revenues are deferrals; accrued revenues and accrued expenses are accruals. Use the definitions below to check your understanding before applying the adjustment process.
Match each definition to its adjusting-entry type and classification. Select all eight answers, then choose Check answers. Each correct selection earns one point.
Review the four types of adjusting entries
- Prepaid expenses — Deferrals
- Costs paid in cash before the related benefits are used or consumed.
- Unearned revenues — Deferrals
- Cash received before services are performed.
- Accrued revenues — Accruals
- Revenues for services performed but not yet received in cash or recorded.
- Accrued expenses — Accruals
- Expenses incurred but not yet paid in cash or recorded.
How do you record an adjusting entry? A 5-step process
| Step | Student question | Evidence |
|---|---|---|
| 1. Identify the period | What belongs in this month or year? | Reporting date and service dates |
| 2. Read the ledger | What amount is already recorded? | Current asset, liability, revenue, or expense balance |
| 3. Determine the target | What should the balance or expense be? | Counts, contracts, schedules, or estimates |
| 4. Record the difference | Which debit and credit produce that result? | Balanced journal entry |
| 5. Post and check | Do the updated balances match the facts? | Ledger and adjusted trial balance |
Date routine period-end adjustments as of the reporting date, even when the accountant prepares them shortly afterward. For example, a December 31 adjustment prepared during the January close belongs to December when it records December activity.
Worked examples: supplies and accrued revenue
Supplies example (a prepaid expense)
Linden Design has $2,100 in Supplies before adjustment. A physical count shows $650 remaining. Supplies used equal $2,100 − $650 = $1,450.
| Account | Debit | Credit |
|---|---|---|
| Supplies Expense | $1,450 | — |
| Supplies | — | $1,450 |
After posting, Supplies equals $650 and Supplies Expense increases by $1,450. Cash does not change because the adjustment records consumption. Omitting the entry overstates assets and net income by $1,450, before income taxes. This difference also overstates equity through income.
Accrued revenue example
On December 31, Linden Design has finished $1,200 of consulting work for a client. The invoice will not go out until January 5, so nothing has been recorded yet.
| Account | Debit | Credit |
|---|---|---|
| Accounts Receivable | $1,200 | — |
| Service Revenue | — | $1,200 |
The revenue belongs to December because the work was done in December. Skipping this entry would understate assets, revenue, and net income by $1,200, before income taxes.
How do depreciation and bad-debt adjustments work?
Some adjustments use estimates. Depreciation allocates an asset’s depreciable cost over its useful life. It does not measure the asset’s current selling price. Depreciation works like a long-term deferral: the company initially recorded the cost as an asset and allocates its depreciable cost over its useful life, regardless of when the asset is paid for. FASB’s Conceptual Framework calls this kind of systematic spreading of cost an allocation.
In a separate hypothetical example, equipment costs $26,400, has a $2,400 residual value (the amount the company expects to get for it at the end of its useful life), and provides service for five years. Straight-line depreciation is ($26,400 − $2,400) ÷ 5 = $4,800 per year, or $400 per full month. Debit Depreciation Expense $400 and credit Accumulated Depreciation—Equipment $400. After the first month, book value (cost minus accumulated depreciation) is $26,400 − $400 = $26,000.
Accumulated depreciation is a contra asset: its credit balance reduces the related asset’s reported net amount while preserving original cost. The allowance for doubtful accounts works similarly for receivables.
Suppose the required ending allowance is $1,800 and the existing allowance has a $400 credit balance. The additional adjustment is $1,400: debit Bad Debt Expense and credit Allowance for Doubtful Accounts. The allowance is an estimate of uncollectibility, not a liability.
Under the current expected credit loss (CECL) model in FASB Accounting Standards Codification (ASC) Topic 326, FASB’s credit-loss guidance explains that relevant information includes historical experience, current conditions, and reasonable and supportable forecasts. In practice, you may see the expense called credit loss expense or provision for credit losses instead of bad debt expense. A percentage is a teaching assumption, not a universal requirement. See our allowance method tutorial for a deeper treatment, and our bad debt write-off guide for what happens when a specific customer account is later written off or recovered.
What happens if you skip an adjusting entry?
| Omitted adjustment | Main balance-sheet error | Net-income error, before tax |
|---|---|---|
| Used prepaid asset | Assets too high | Too high |
| Earned customer advance | Liabilities too high | Too low |
| Unrecorded earned revenue | Assets too low | Too low |
| Unrecorded incurred expense | Liabilities too low | Too high |
Do not record cash again in the routine timing adjustments covered here. Do not adjust a receivable merely because it remains unpaid if its revenue was already recorded. Also distinguish an ordinary adjustment from correcting an erroneous cash entry; correcting entries can involve Cash.
Exam trap: a prepayment recorded as an expense
Some textbook and exam problems record a prepayment directly as an expense instead of an asset. When that happens, the adjustment runs the other way: you move the unused part out of the expense and into the asset.
Example: On October 1, a company pays $2,400 for 12 months of insurance and debits Insurance Expense. Each month of coverage costs $2,400 ÷ 12 = $200. On December 31, 9 months are still unused, so the unused amount is 9 × $200 = $1,800.
Debit Prepaid Insurance $1,800; credit Insurance Expense $1,800.
The ending balances are the same as if the payment had first been recorded as an asset: Prepaid Insurance $1,800 and Insurance Expense $600. Always read the original entry before choosing your debit and credit.
Key takeaways
- Adjusting entries are recorded at the end of a period so revenues and expenses land in the period they belong to.
- There are four main types: prepaid expenses and unearned revenues (deferrals), plus accrued revenues and accrued expenses (accruals).
- Each routine adjustment usually changes one income statement account and one balance sheet account, and it does not touch Cash.
- Estimates such as depreciation and the allowance for doubtful accounts are also recorded as adjustments.
- Skipping an adjustment misstates both net income and the balance sheet, even when the trial balance still balances.
Practice questions with explained answers
1. A customer paid $3,000 in advance. Services worth $800 are now completed. What is the adjustment?
Answer: Debit Unearned Revenue $800 and credit Service Revenue $800. The company reduces its remaining obligation; it does not record another cash receipt. Unearned Revenue drops from $3,000 to $2,200, which is the value of services the company still owes the customer.
2. Employees earned $900 that has not been recorded or paid. What changes?
Answer: Debit Wages Expense $900 and credit Wages Payable $900. Expense and liabilities increase; net income decreases.
3. Must every account in the trial balance be adjusted?
Answer: No. Review every relevant balance, but record an adjustment only when the recorded amount needs updating. An already correct balance requires no entry.
Frequently asked questions
Are adjusting entries the same as closing entries?
Answer: No. Adjustments update recognition and account balances before the financial statements are prepared. Closing entries come later: they transfer the balances of temporary accounts (revenues, expenses, and dividends or owner withdrawals) into retained earnings or the owner’s capital account. See our closing entries guide for the full process.
Can a trial balance balance before adjustments?
Answer: Yes. Equal debits and credits do not prove that all earned revenue or incurred expenses have been recorded. That is why the unadjusted trial balance is a starting point, not the final word.
What happens after posting the adjustments?
Answer: Prepare the adjusted trial balance, which lists the updated ledger balances used to prepare financial statements.
What are the four types of adjusting entries?
Answer: The four types are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. Prepaid expenses and unearned revenues are deferrals, where cash moved before the activity. Accrued revenues and accrued expenses are accruals, where the activity happened before cash moved.
Do adjusting entries affect cash?
Answer: No. Routine adjusting entries do not touch the Cash account. They update balances for activity that already happened, such as used supplies or earned wages. If an entry needs to change Cash, it is usually a correcting entry for an error, not an adjustment.
When are adjusting entries recorded?
Answer: They are recorded at the end of each accounting period, before the financial statements are prepared, and dated as of the last day of that period. A company that prepares monthly statements adjusts every month; one that prepares only annual statements adjusts at year-end.
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