Adjusting journal entries: accruals, deferrals and depreciation
What adjusting entries are, the four types every period-end needs, how to calculate them, and how a missing adjustment distorts profit.
Month end · Updated 21 October 2026
Adjusting entries are made at the end of a period so the financial statements show what the period actually earned and used, not just what was invoiced or paid. They never involve cash.
Deferrals: cash first, expense or revenue later
Prepaid expenses. Insurance of 2,400 paid on 1 April for twelve months is an asset at first. At the end of April, one month (200) is used: debit Insurance expense 200, credit Prepaid insurance 200.
Unearned revenue. A 1,500 deposit for a website is a liability until the work is done. When 40% is complete, recognise 600: debit Unearned revenue 600, credit Service revenue 600.
Accruals: expense or revenue first, cash later
Accrued expenses. Staff have worked two days that will be paid next month at 300 a day: debit Salaries expense 600, credit Salaries payable 600. Interest on a 24,000 loan at 6% accrues at 120 a month whether or not it has been paid.
Accrued revenue. Work worth 1,800 is finished on 30 June but invoiced on 5 July: debit Accounts receivable 1,800, credit Service revenue 1,800.
Depreciation and estimates
Depreciation allocates an asset's cost over its useful life. Equipment costing 42,000 with a five-year life and no residual value is depreciated at 700 a month on a straight-line basis: debit Depreciation expense, credit Accumulated depreciation. Estimates such as credit loss allowances are adjusted the same way.
What a missing adjustment does
Before adjustments, a company reports June profit of 12,000. It forgot to accrue utilities of 450, salaries of 2,100 and interest of 250, and unbilled revenue of 1,600. Correct profit is 12,000 − 450 − 2,100 − 250 + 1,600 = 10,800. Every missed adjustment misstates both the income statement and the statement of financial position.
Should you reverse them?
Accruals can be reversed on the first day of the next period so the later payment is recorded normally. Depreciation and allowance adjustments are never reversed.
The adjustments as journal entries
Here are the entries from the examples above, in one table, as they'd be posted at the month-end:
| Adjustment | Debit | Credit | Amount |
|---|---|---|---|
| Insurance used in April | Insurance expense | Prepaid insurance | 200 |
| Website work 40% complete | Unearned revenue | Service revenue | 600 |
| Two days' unpaid salaries | Salaries expense | Salaries payable | 600 |
| One month's loan interest | Interest expense | Interest payable | 120 |
| Work done, invoiced next month | Accounts receivable | Service revenue | 1,800 |
| Monthly depreciation | Depreciation expense | Accumulated depreciation | 700 |
Every line pairs an income statement account with a statement of financial position account. That's the signature of an adjusting entry — and why none of them touch Cash.
How the calculations work
- Prepaid expenses: amount paid ÷ months of cover × months used. 2,400 ÷ 12 × 1 = 200.
- Unearned revenue: amount received × proportion of the work done. 1,500 × 40% = 600.
- Accrued salaries: daily rate × days worked but unpaid. 300 × 2 = 600.
- Accrued interest: principal × annual rate × months ÷ 12. 24,000 × 6% × 1 ÷ 12 = 120.
- Straight-line depreciation: (cost − residual value) ÷ useful life in months. 42,000 ÷ 60 = 700.
The depreciation guide covers reducing-balance and units-of-production methods, part-year charges and disposals.
A reversing entry, worked through
The two days of salaries (600) were accrued on 30 April. On 1 May the accrual is reversed: debit Salaries payable 600, credit Salaries expense 600. When the full fortnight's pay of 3,000 is paid on 7 May, it's recorded in the normal way: debit Salaries expense 3,000, credit Cash 3,000. May's salaries expense is 3,000 − 600 = 2,400 — exactly the eight days worked in May — and nobody processing payroll needed to know an accrual existed.
A month-end adjustments checklist
- Prepayments: rent, insurance, subscriptions, licences — release the portion used.
- Unearned revenue: deposits and subscriptions — recognise what's been delivered.
- Accrued expenses: wages, utilities, interest, professional fees, goods received but not yet invoiced.
- Accrued revenue: work done or goods delivered but not yet invoiced.
- Depreciation and amortisation on every asset in use.
- Estimates: the allowance for credit losses, inventory write-downs, provisions.
- Review the adjusted trial balance against last month and the budget, and explain the big movements.
Common mistakes
- Adjusting with Cash. If an adjusting entry debits or credits Cash, it's not an adjustment — it's a transaction that was missed.
- Recognising a full year of a prepayment in the month it's paid.
- Accruing the same cost twice: once as an accrual and again when the invoice is posted, because the accrual wasn't reversed.
- Forgetting the part month when an asset or loan starts mid-month.
- Treating unearned revenue as revenue because the cash is in the bank.
Frequently asked questions
Do adjusting entries affect cash?
No. They change when income and expenses are recognised; cash moves when customers and suppliers pay.
When are adjusting entries made?
At the end of every reporting period — monthly for management accounts, and at the year-end for the annual financial statements.
Why does accrual accounting need adjustments at all?
Because transactions are recorded from documents as they arrive, and documents don't line up neatly with periods. The accrual accounting guide explains the principle with a worked month.
Practise it
The graded lessons on prepayments and unearned revenue, accrued expenses and revenue, reversing entries and the adjusted trial balance cover each type. The Retail Month-End case and Year-End Closing case put them into a real close, and the Month-end accountant pathway finishes with the month-end close check on the exams page.