What is Adjustment Journal Entry?
Definition
An adjustment journal entry is an accounting entry posted to update revenue, expenses, assets, or liabilities so the general ledger reflects the correct reporting period. It is commonly used during month-end, quarter-end, or year-end close when transactions need to be accrued, deferred, reclassified, estimated, corrected, or aligned with supporting schedules. In practice, an Adjustment Journal Entry helps finance teams apply accrual accounting properly and produce reliable financial statements.
How an Adjustment Journal Entry Works
An adjustment journal entry starts with a difference between what is currently recorded and what should be reflected in the books. The difference may come from a missing supplier invoice, revenue earned but not billed, prepaid cost amortization, depreciation, inventory adjustment, intercompany allocation, or account reconciliation issue. Finance identifies the required debit and credit, prepares support, obtains approval, and posts the entry to the general ledger.
The entry may be recurring, such as monthly prepaid insurance amortization, or non-recurring, such as a one-time reclassification between expense categories. Some entries reverse automatically in the next period, while others remain until the underlying balance is settled or fully recognized.
Common Types
Adjustment journal entries can support many close activities. The type of adjustment depends on the accounting issue being corrected or recognized.
Accruals: Record expenses or revenue earned before an invoice is issued or received.
Deferrals: Release prepaid expenses or deferred revenue into the correct period.
Reclasses: Move amounts between accounts, departments, entities, or cost centers.
Estimates: Record provisions, allowances, bonuses, rebates, or reserves.
Reconciliations: Correct account balances based on supporting schedules or subledger reviews.
Practical Example
Assume a company receives legal services worth $18,000 in March, but the supplier invoice arrives in April. To close March accurately, finance records an adjustment journal entry that debits legal expense for $18,000 and credits accrued expenses for $18,000. This records the cost in the period when the service was received. When the April invoice is processed, the accrued liability is cleared so the expense is not counted twice.
Another example is prepaid software. If a company pays $36,000 for a 12-month subscription, it may record $3,000 per month as software expense. The monthly adjustment reduces the prepaid asset and records the correct expense for that month, improving profitability analysis and cash flow interpretation.
Controls and Documentation
Adjustment journal entries need strong controls because they can change reported profit, account balances, and management metrics. A Standard Journal Entry Template should capture the entry purpose, business reason, debit account, credit account, amount, accounting period, preparer, reviewer, supporting evidence, and reversal date where applicable.
Strong Journal Entry Governance also requires clear ownership. The preparer should document the calculation, while the reviewer checks account coding, period accuracy, evidence, and approval. Segregation of Duties (Journal Entry) helps ensure that the same person is not responsible for preparing, approving, and posting sensitive adjustments without review.
Review and Approval
Finance teams should review adjustment journal entries before close is finalized. Reviewers usually focus on materiality, unusual accounts, late postings, round-number amounts, manual adjustments, and entries posted outside standard patterns. A Preventive Control (Journal Entry) can help stop incomplete or unsupported entries before posting, while a Detective Control (Journal Entry) helps identify unusual entries after posting.
Some companies also use Smart Journal Entry Classification to group entries by purpose, such as accrual, deferral, reclass, correction, consolidation, or intercompany. This makes review easier and gives controllers a clearer view of what changed during close.
Connection With Reconciliation and Consolidation
Adjustment journal entries often come from reconciliation work. A Reconciliation Journal Entry may be posted when a balance sheet account does not agree with its supporting schedule, or when a timing item must be corrected. For group reporting, a Consolidation Journal Entry may adjust eliminations, foreign currency effects, intercompany balances, or group-level accounting presentation.
Some adjustments are standard and repeat each period, while others are classified as a Non-Standard Journal Entry because they are unusual, judgment-based, or outside the normal close pattern. These entries usually require stronger explanation and approval evidence.
Best Practices
Finance teams should define clear rules for when adjustment journal entries are required, who can prepare them, who can approve them, and what evidence must be attached. Recurring entries should use approved templates and defined schedules. Non-recurring entries should include a concise explanation of the accounting issue, the business event, and the reason the entry is needed.
A Rule-Based Journal Entry approach can improve consistency for recurring accruals, deferrals, and allocations. Where available, Journal Entry Automation can help prepare recurring entries, route approvals, attach support, and maintain a clear audit trail for close review.
Summary
An adjustment journal entry updates the books so revenue, expenses, assets, and liabilities are recorded in the correct period. It supports accurate accruals, deferrals, estimates, reclasses, reconciliations, consolidation adjustments, cash flow analysis, and overall financial reporting performance.
