What are Adjusting Journal Entries?

Definition

Adjusting journal entries are accounting entries recorded at the end of a reporting period to ensure revenue, expenses, assets, and liabilities are stated in the correct period. They are used when cash timing and accounting recognition timing differ, or when estimates, deferrals, accruals, depreciation, amortization, or corrections must be reflected before financial statements are finalized. In practice, adjusting journal entries help finance teams align the general ledger with accrual accounting principles and improve financial reporting accuracy.

How Adjusting Journal Entries Work

Adjusting journal entries are usually posted during month-end, quarter-end, or year-end close. Finance teams review transactions, supporting schedules, open invoices, prepaid balances, revenue schedules, depreciation records, accrual estimates, and reconciliations to determine whether the ledger needs an adjustment. The entry then updates the relevant balance sheet and income statement accounts.

For example, if a company receives services in March but the supplier invoice arrives in April, March still needs to reflect the expense. An adjustment records the expense and a liability in March. When the invoice is processed later, the liability can be cleared. This keeps expenses aligned with the period in which the benefit was received.

Common Types

Adjusting entries can cover several recurring accounting areas. The exact entry depends on the transaction type, timing difference, and accounting policy.

• Accrued expenses: Record costs incurred before supplier invoices are received.

• Accrued revenue: Record revenue earned before billing is completed.

• Deferrals: Release prepaid expenses or deferred revenue into the correct period.

• Depreciation and amortization: Recognize periodic asset cost based on useful life or benefit period.

• Estimates: Record provisions, allowances, bonuses, rebates, or other management estimates.

Practical Example

Assume a company receives consulting services worth $15,000 in June, but the vendor invoice is received in July. To close June accurately, finance records an Adjusting Journal Entry debiting consulting expense for $15,000 and crediting accrued expenses for $15,000. This records the cost in the month the service was consumed. In July, when the invoice is processed, the accrued liability is reversed or cleared so the cost is not double-counted.

A similar adjustment applies to annual insurance paid in advance. If a company pays $24,000 for 12 months of insurance, it may recognize $2,000 per month as insurance expense and keep the remaining balance as a prepaid asset. This gives management a cleaner view of monthly profitability and expense trends.

Controls and Documentation

Adjusting entries require strong controls because they can affect reported profit, assets, liabilities, and key management metrics. Finance teams should use a Standard Journal Entry Template that captures entry purpose, account coding, amount, period, preparer, reviewer, source evidence, and reversal instructions where needed.

Every material adjustment should have Journal Supporting Documentation such as invoices, contracts, schedules, calculations, approvals, or reconciliation files. Review design should also follow Segregation of Duties (Journal Entry) so the person preparing an entry is not the only person approving it. This improves close discipline and audit confidence.

Review and Audit Use

Adjusting journal entries are closely reviewed during close and audit because they often involve estimates, manual judgment, or period-end corrections. Controllers may compare current-period entries with prior periods, budget expectations, and account activity to identify unusual movements. This is where Analytical Review (Journal Entries) helps explain whether an entry is consistent with business activity.

Auditors may also perform Substantive Testing (Journal Entries) by selecting entries and tracing them to support. Entries posted late in the close, entered manually, rounded to unusual amounts, or posted to sensitive accounts often receive additional review. Well-organized support helps finance teams explain the business reason and accounting basis for each adjustment.

Connection With Reconciliations and Consolidation

Adjusting entries often come from reconciliations. A Reconciliation Journal Entry may be needed when a balance sheet account does not agree with its supporting schedule, or when a timing difference must be corrected before close. For group reporting, a Consolidation Journal Entry may adjust intercompany balances, eliminations, foreign currency effects, or group-level accounting entries.

Modern close teams may also use Smart Journal Entry Classification to categorize recurring accruals, deferrals, reclasses, and corrections more consistently. This helps reviewers understand entry purpose and supports faster analysis of period-end activity.

Best Practices

Finance teams should maintain clear policies for recurring and non-recurring adjusting entries. Recurring entries should have standard schedules and defined reversal dates. Non-recurring entries should include a clear business explanation and approval evidence. Sensitive adjustments should be reviewed against materiality thresholds, account ownership, and close deadlines.

Good practice also includes using Preventive Control (Journal Entry) checks before posting and Detective Control (Journal Entry) reviews after posting. These controls help confirm that entries are complete, accurate, authorized, and posted to the correct accounting period.

Summary

Adjusting journal entries ensure that financial statements reflect the correct revenue, expenses, assets, and liabilities for a reporting period. They support accurate accruals, deferrals, reconciliations, estimates, close execution, audit readiness, cash flow analysis, and overall financial reporting performance.