Adjusting journal entries: a practical guide

Getting the books right at period end is rarely as simple as it sounds. Transactions don’t always align neatly with accounting periods, and that gap between economic reality and recorded figures is exactly where adjusting journal entries come in. Whether you’re managing a growing finance team or tightening up your month-end close process, understanding how accounting adjustments work is foundational to producing accurate, reliable financial statements.

Adjusting entries are one of those topics that sit at the heart of accrual accounting. They’re not glamorous, but they’re essential. Get them wrong and your income statement, balance sheet, and cash flow story all start to drift from reality. Get them right, and you build the kind of financial reporting that stakeholders, auditors, and leadership can genuinely trust.

Types of adjusting journal entries explained

There are four main categories of adjusting journal entries, each addressing a specific mismatch between cash flow and accounting recognition.

Accrued revenues: Revenue earned but not yet invoiced or received. For example, a service delivered in December that won’t be billed until January needs to be recognized in the correct period.
Accrued expenses: Costs incurred but not yet recorded or paid, such as salaries owed at month-end or interest accumulating on a loan.
Deferred revenues: Cash received in advance for services not yet delivered. The income must be deferred until the obligation is fulfilled.
Prepaid expenses: Payments made ahead of time, like annual insurance premiums, that need to be spread across the relevant accounting periods.

Beyond these four, depreciation entries form a fifth common type. Fixed assets lose value over time, and that reduction needs to be systematically recorded as an expense. Each of these entry types reflects a core principle of accrual accounting: matching revenues and expenses to the period in which they occur, regardless of when cash changes hands.

When adjusting entries are recorded

Adjusting entries are recorded at the end of an accounting period, before financial statements are prepared. That period could be monthly, quarterly, or annually, depending on how your organisation structures its reporting cycle.

In practice, most finance teams prepare period end adjustments as part of the month-end close. This is the window between the last business day of the month and the point at which financials are finalised and reported. The timing matters because adjusting entries directly affect the figures that appear on the income statement and balance sheet for that period. Post them too late and you risk restating figures; skip them entirely and your reports are simply inaccurate.

For organisations running a tight close cycle, the pressure to complete accrual adjustments quickly without sacrificing accuracy is real. That’s why having a clear, repeatable process in place makes such a difference to both speed and quality.

Step-by-step process for preparing adjusting entries

Preparing adjusting journal entries doesn’t need to be complicated, but it does require a consistent approach. Here’s a practical process that works well for most finance teams.

1. Review the trial balance

Start by pulling the unadjusted trial balance. This gives you a clear picture of what’s been recorded and where gaps or anomalies might exist. Look for accounts that typically require adjustment, such as prepaid expenses, accrued liabilities, and deferred income.

2. Identify transactions requiring adjustment

Work through each account methodically. Confirm whether revenues have been earned and expenses incurred within the period. Cross-reference supporting documents like contracts, invoices, payroll schedules, and loan statements to identify what needs to be recognized or deferred.

3. Calculate the adjustment amounts

For each adjustment, calculate the exact amount to be recognized. For depreciation, this means applying the correct method (straight-line, declining balance, etc.). For accruals, it means estimating based on contractual terms or known obligations.

4. Prepare and post the journal entries

Each adjusting journal entry should include the date, account names, debit and credit amounts, and a clear description of what the entry represents. This documentation is critical for audit trails and for anyone reviewing the entries later.

5. Review and approve

Before posting, entries should be reviewed by a second set of eyes. A structured approval workflow reduces the risk of errors making it through to the final financial statements.

Common adjusting entry mistakes and how to avoid them

Even experienced accountants run into problems with adjusting entries. Knowing where things typically go wrong is the first step to avoiding those pitfalls.

Missing entries altogether is the most common issue. When close processes rely on manual checklists and email reminders, it’s easy for an accrual to slip through unrecorded. Building a standardised checklist tied to specific accounts and responsible owners helps ensure nothing gets missed.

Incorrect period allocation is another frequent problem. Posting an expense to the wrong month distorts both the current and prior period figures. Always confirm the economic event date, not just the invoice or payment date, before recording.

Reversals not being set up can cause double-counting in the following period. Many accrual adjustments should be reversed at the start of the next period when the actual invoice or payment arrives. If reversals aren’t automated or tracked, the same amount can end up recorded twice.

Lack of supporting documentation creates audit risk. Every adjusting entry should be traceable back to a source document or calculation. Without it, the entry becomes difficult to defend during a review or audit. Tools like Aico’s journal entry management help teams attach documentation directly to entries, keeping everything in one place and audit-ready.

Adjusting entries vs. closing entries: key differences

Adjusting entries and closing entries are both part of the end-of-period accounting cycle, but they serve very different purposes and should not be confused.

Adjusting entries update account balances to reflect the true financial position at period end. They affect both the income statement and balance sheet, and they are made before financial statements are prepared. Their purpose is accuracy: ensuring that revenues and expenses are recorded in the right period.

Closing entries, on the other hand, are made after the financial statements are complete. Their job is to reset temporary accounts (revenues, expenses, and dividends) to zero so that the next accounting period starts fresh. Closing entries transfer balances into retained earnings and do not affect the balance sheet directly in the same way adjusting entries do.

A helpful way to think about it: adjusting entries refine the picture, while closing entries reset the canvas. Both are necessary steps in the accounting cycle, but they happen in sequence and serve distinct functions. Mixing them up or performing them out of order leads to errors that can be difficult to untangle.

As finance teams look to reduce close cycle times in 2026 and beyond, getting both processes right, and automating where possible, is increasingly where the competitive advantage lies. A well-managed close built on accurate period-end journal entries gives leadership the confidence to make faster, better-informed decisions. That’s not just good accounting. That’s good business.