6 Types of Adjusting Journal Entries (With Examples)
By Indeed Editorial Team
Updated July 14, 2022 | Published August 18, 2021
Updated July 14, 2022
Published August 18, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When reviewing your financial records at the end of a pay period, you may need to enter new entries, like adjusting journal entries. Adjusting journal entries are useful for tracking expenses and revenue when you may not receive or make payments at the point of sale. Learning when to use the different types of adjusting journal entries can help ensure you accurately record financial transactions like accruals and deferrals.
In this article, we explain what adjusting journal entries are, detail why they’re important and review six entries you may use.
An adjusting journal entry is a financial record you can use to track unrecorded transactions.
Some common types of adjusting journal entries are accrued expenses, accrued revenues, provisions, and deferred revenues.
You can use an adjusting journal entry for accrual accounting when accounting periods transition.
What are adjusting journal entries?
Adjusting journal entries are entries in a financial journal that ensure a business allocates its income and expenses properly. You typically enter these at the end of a fiscal period to ensure that any income you earn or expenses you incur reflect the fiscal period in which they occurred. Sometimes, adjusting entries are corrections to mistakes you might make when recording financial transactions for the first time. This encourages recording finances using the accrual method, or the time when a company performs services, rather than when they receive payment.
Why are adjusting journal entries important?
It's important that businesses accurately record transactions to understand what they've earned and what they might budget for future accounting periods. Some reasons why adjusting journal entries are necessary include:
Accurate financial records: If you performed work in August and a customer pays you in September, it's important to adjust the August income statement with that amount. Adjusting this entry ensures you accurately record revenue for the correct time period.
Accurate expense tracking: You may pay for certain expenses in a period but experience the value over time, so you may make adjusting entries to account for this. For example, if you buy supplies for your office, you can share that expense across different accounting periods until you buy new ones because you don't use them at one time.
Corrections for mistakes: When reviewing your documents, you may find errors in your balance sheets or income statements. Adjusting entries can ensure you correct the amounts, rather than changing the original entry.
Related: 6 Rules for Journal Entries
6 types of adjusting journal entries
You create adjusting journal entries for different reasons at the end of accounting periods, such as accruals, deferrals or depreciation. Here are some of the most common types of adjusting entries you can expect to make:
1. Accrued expenses
Accrued expenses, or accrued liabilities, are those that you incur in a pay period but pay for at a later date. This can happen with recurring bills, like utilities or payroll. For example, your employees may work throughout the month but receive a paycheck on the first of the following month. Because the amount applies to the previous month, you make an accrued expense adjustment.
Example: BlueButton Marketing, Inc. worked in the office for the month of September. The amount of electricity the company used equaled $12,000 for the month. On October 1, the business received the bill and wrote a check to the electric company on October 2. They recorded this on an adjusted entry sheet for September:
|September 30||Electricity bill||$12,000|
|September 30||Accrued expenses||$12,000|
|October 2||Accrued expenses||$12,000|
2. Accrued revenues
Accrued revenue is when you earn money for providing products or services to customers but receive payment at a later date. Because it's important that you accurately record revenue in the correct accounting period, you make an adjusting entry. Often, this happens more with services and interest accrual.
Example:A family hires SemiGloss Painters to repaint their entire house in December. The total job, including labor and supplies, equals $5,000. SemiGloss sends the invoice on December 30 but receives payment on January 5. They record an adjusted entry like this:
|December 30||Accrued revenue||$5,000|
|January 2||Accrued revenue||$5,000|
3. Deferred expenses
Deferred or prepaid expenses are amounts companies pay in advance for services or products. Different from accrued expenses, you make this adjustment to the month in the future when the service takes place. This is common in advertising, advance rent payments and insurance payments.
Example: Sara started a new business in March and just purchased new office space. In order to move in, she had to pay the first and last month's rent. Her lease officially starts on April 1, and she makes the payment of $2,800 on March 28 to ensure everything is ready. Her recorded data looks like this:
|March 28||Prepaid rent||$2,800|
|April 1||Rent expense||$2,800|
|April 1||Prepaid rent||$2,800|
4. Deferred revenues
Deferred revenue is when you receive payment for a service you've yet to perform or a product you've yet to receive. This is common in subscription models or when retail stores sell gift cards. For example, you can receive payment as a gift card but may make the adjustment for the month when the customer redeems their card.
Example: WeBuild Construction signed an agreement to build a shed for a first-time homeowner. They schedule the work to begin on June 10 but require a down payment of $1,000 before the work begins. The homeowner pays this amount on May 30:
|May 30||Deferred revenue||$1,000|
|June 30||Deferred revenue||$1,000|
|June 30||Earned revenue||$1,000|
5. Depreciation expenses
Depreciation expenses are when you make a one-time payment to account for equipment's loss in value. Calculate depreciation by subtracting the original value from the current value of an item. To record this as an adjusting entry, divide this amount by the number of months you've used the equipment. You can calculate depreciation in other ways, and how you record this can vary based on your cash and liability.
Example: QuickDeliveries purchased a new car for $20,000. After a year of delivering and using a lot of miles, the car's value decreases by $3,000. When filing their taxes, they pay a one-time $3,000 fee and submit adjusted entries of $250 for each month in the year. The company’s data looks like this:
|December 30||Depreciation expenses||$250|
|December 30||Depreciation adjustment||$250|
|January 5||Depreciation payment||$3,000|
|January 5||Depreciation adjustment||$3,000|
Provisions are amounts of money provided to a business to anticipate costs. The most common provision is the allowance for doubtful accounts. You might use this if you offer credit to customers and anticipate they may miss payments.
Example: Pavers United paved a new customer's driveway for $4,000. The customer paid $1,000 at first, and the company offered credit payments for the remaining $3,000. They record this adjusting entry, as they anticipate the customer may not pay:
|May 1||Bad debts expenses||$3,000|
|May 1||Allowance for doubtful accounts||$3,000|
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