What is an adjusting journal entry?

Definition

An adjusting journal entry is a period-end posting that records amounts already earned or incurred but not yet in the books. It puts those amounts into the correct month before the statements are issued.

In the books, the adjustment is still an ordinary two-sided entry. One side is usually an Income Statement account, and the other side is usually a Balance Sheet accrual, deferral, or contra account.

Where it shows up

Balance Sheet: Related to the accrual, deferral, or contra account the other side hits.

P&L: Related to the expense or revenue the adjustment records.

Cash flow: Related to nothing extra; cash has not moved yet.

See also: Journal Entry · Adjusted Trial Balance · Month-End Close

You will not see a heading called adjusting journal entry on the statements. You will see the expense, revenue, asset, or liability the adjustment put there.

On the Income Statement, wage expense, prepaid rent that has now been used, or unearned sales that are now earned all show up because an adjustment recorded them. Without that posting, the month would be missing costs or earnings that already happened.

On the Balance Sheet, the other side often lands in current liabilities or current assets. Accrued wages, prepaid balances, and unearned revenue are typical homes for that other side.

Cash flow does not move. The point of the adjustment is that cash has not moved yet, and the books still need the amount in this period.

How it works

First you print or review the unadjusted account balances. Then you look for amounts that belong in this period but are not yet posted.

Wages earned since the last payday are a common case. The work happened this month, so the expense belongs this month even though the paycheck is next month.

A prepaid cost that has now been used is another case. The cash went out earlier, and this month's share of the cost still needs to hit expense.

Revenue collected in advance that has now been earned is a third case. Cash already came in, and this month's earned share still needs to leave the liability and hit revenue.

Cutoff is the rule behind all of those cases. The adjustment puts the transaction in the period in which it actually occurred.

The matching principle is the same idea for costs. Expenses land in the same period as the revenue they helped produce.

You then post the two-sided entry to the general ledger. After posting, a new Trial Balance, the Adjusted Trial Balance, includes those amounts.

The adjustment is not the later cash event. Payday, the later invoice, or the later collection is a separate posting in a later period.

Example

A florist's month ends on a Tuesday. Staff have earned $200 since the last payday, and payday is next week.

The florist records the $200 as this month's wage expense. The other side is accrued wages, a liability, because the pay has not gone out.

Debit: Wage expense $200

Credit: Accrued wages $200

Wage expense on the Income Statement rises by $200. Accrued wages on the Balance Sheet rises by $200, and cash does not move.

The florist is not paying anyone in this entry. The adjustment only records work already done that was not yet in the books.

Common mix-ups

An adjusting journal entry is not the payday posting. Payday will reduce the liability and reduce cash later, while this entry only records the unpaid amount at period end.

It is not a recurring journal entry just because you book it every month. Recurring entries repeat the same amounts on a schedule, and adjustments are sized to what is still missing this period.

It is not a correction of a prior error by default. You can use an adjustment to fix a cutoff miss, but most adjustments simply record accruals and deferrals that were never meant to wait for cash.

It is not a cash-basis entry. Cash-basis books wait for money to move, and an adjusting journal entry exists so accrual books can show the month that actually happened.

Related terms

• Journal Entry: A dated record of debits and credits posted to the ledger.
• Accrual: Recording an expense or revenue when it happens rather than when cash moves.
• Deferral: Pushing recognition of a cost or revenue to a later period than the cash movement.
• Trial Balance: A listing of every ledger account balance, used to check that debits equal credits.
• Adjusted Trial Balance: The trial balance after all period-end adjusting entries are posted.
• Month-End Close: The monthly version of the close, ending in issued financial statements.
• Cutoff: The rule that transactions land in the period in which it actually occurred.
• Matching Principle: Recording expenses in the same period as the revenue they helped produce.