Adjusting Entry

Some financial events happen gradually or are not captured by everyday transactions. Adjusting entries bring the books up to date before the financial statements are prepared.

Common examples include accrued expenses, such as wages earned by staff in the last days of the month but not yet paid. Accrued revenue covers work done but not yet billed. Prepaid expenses, such as insurance paid in advance, need adjusting as each month's cover is used up. Depreciation spreads the cost of equipment across the years it is used.

Suppose a company pays 12,000 for a year of insurance on 1 January. At the end of January, an adjusting entry moves 1,000 from prepaid insurance, an asset, to insurance expense, because one month of cover has been used.

Adjusting entries are required under accrual accounting. Without them, profit in one month could be overstated and in another understated, simply because of when bills were paid. They usually do not involve cash; they move amounts between accounts so each period reflects what really happened.