What are adjusting entries, as described in this lesson?
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Accounting · Foundations
Adjusting Entries
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Adjusting entries Journal entries made at the end of an accounting period to record transactions and events the books have not yet captured; the definition guiding this lesson comes from OpenStax's Principles of Accounting. Full entry → are journal entries made at the end of an Accounting period The stretch of time — often a month, quarter, or year — over which a business records activity and reports results before the cycle begins again. Full entry → to record things the books have not yet captured — the definition guiding this lesson comes from OpenStax's Principles of Accounting. Some events happen gradually: supplies get used, prepaid rent runs out, wages are earned but unpaid. At period end, the bookkeeper adjusts the accounts for prepayments used up, accrued expenses, and Accrued revenue Income earned in the period but not yet recorded or collected, such as services completed but not yet billed to the customer. Full entry →. Adjustments come after the trial balance and before the statements — and they are how the books tell the truth about the period.
Why this matters
If a period's books contained only the transactions someone happened to write down, the statements would lie: profit would be overstated when used supplies never became an expense, and understated when wages earned but unpaid never appeared. Adjusting entries close that gap, and every reader of the statements depends on it. A lender sizing up a loan, an owner deciding whether to expand, a manager judging a slow month — all of them need numbers that match what actually happened in the period. Learning when and why adjustments are made is the difference between reading a business's true results and reading its rough draft.
The college version
What adjusting entries are
OpenStax's Principles of Accounting says adjusting entries update accounting records at the end of a period for any transactions that have not yet been recorded. CFI frames the same idea as the entries that record the revenue and expense recognition that belongs to a period, pairing each adjustment with the cash settlement that comes before or after it. In plainer words: adjusting entries are journal entries made at the end of a period to record things the books have not yet captured. Notice what the definition is not. It is not about fixing mistakes — a wrong number typed into the ledger gets a correcting entry, not an adjustment. It is about finishing: capturing activity that genuinely happened but never made it into the journal, because nothing during the period triggered a recording. Adjustments are routine, expected, and made every period.
Why they exist: the timing problem
Most transactions announce themselves. A sale produces an invoice, a purchase produces a receipt, a loan payment produces a bank statement — the paper trail triggers the journal entry. But some events happen gradually and quietly. A design studio buys $900 of paper and ink; by month end, $300 of it has been used, and no invoice exists for “paper used.” A bakery pays three months of rent in advance; each week that passes consumes part of that prepayment. A shop's employees earn wages every day, but payday falls on the first of next month. OpenStax puts it directly: journal entries are triggered by original source documents, and not every transaction produces one. Using supplies from the supply closet generates no document, and a customer does not send a reminder that revenue has now been earned. Those silent, gradual events are the timing problem, and adjusting entries are the answer.
The common types
Accountants sort adjusting entries into a few familiar types. Prepayments used up: money paid in advance for something not yet consumed — supplies, rent, insurance. The used portion stops being an asset and becomes an expense; OpenStax's supplies example moves $150 of use out of a $400 supply balance, leaving $250 still on the balance sheet. Unearned revenue A liability created when a customer pays before the business delivers the goods or service; it becomes revenue as the business performs. Full entry →, the flip side: a customer pays $300 in advance for a workshop, which is a liability until the workshop happens, and becomes revenue as it happens. Accrued expenses: costs incurred but not yet recorded or paid — wages earned but unpaid, interest that has built up on a loan, a utility bill that has not arrived. Accrued revenue: income earned but not yet recorded or collected — work finished but not yet billed. Each adjustment pairs one income statement account with one balance sheet account, and no adjusting entry touches cash; the cash side was or will be recorded separately. Depreciation, a close cousin, gets its own lesson.
When they happen
Adjusting entries have a fixed place in the accounting cycle. First the bookkeeper records the period's transactions, posts them to the ledger, and runs an unadjusted trial balance — the first check that debits equal credits. Then come the adjusting entries: after the trial balance and before the financial statements, followed by an adjusted trial balance that reflects them. That position matters. The statements are built from adjusted balances, so an adjustment made after the statements would arrive too late, and an adjustment before the trial balance would defeat the check. The trial balance and the full cycle each have their own lessons; the point here is the slot: adjustments sit between the rough check and the final report, every period, without exception.
Adjusting versus closing, and the honest framing
Two end-of-period routines sound alike and do opposite jobs. Adjusting entries update the accounts so the period's statements tell the truth — they add what was missing. Closing entries Entries made after the financial statements that zero out revenue and expense accounts so the next accounting period starts fresh. Full entry →, which CFI describes as zeroing out revenue and expense accounts, wipe the slate for the next period — they reset what the period produced. Adjustments happen before the statements; closing happens after. Adjusting never resets an account, and closing never corrects a balance. And the honest framing: adjustments are not busywork or a loophole. They are how accountants tell the truth about a period. OpenStax says the entries exist so the income statement and balance sheet present correct, up-to-date numbers, and CFI says the statements end up reflecting a more accurate financial picture of the company. A company that skips adjustments does not save time — it publishes a rough draft as its final report.
Eli explains
The same idea, in plain words
Explain it like I’m 10
Adjusting entries are the end-of-period updates that catch the quiet stuff. During the month, the bookkeeper records what arrives with paperwork: sales, purchases, payments. But some things happen without paperwork. The studio used up part of its paper supply. The rent paid in advance got a little more used up with each passing week. Employees earned wages that will not be paid until next month. None of these produced a document, so none were recorded — yet they all happened. At period end, the bookkeeper makes an adjusting entry for each one: the used-up prepayments move from asset to expense, the unpaid wages appear as an expense and a liability, and the unbilled work appears as revenue. Then the statements are built from numbers that match reality.
Picture it like this
Think of a gym membership. You pay for the whole year in January, but the membership is used up a little every time you walk in. If you tracked it only as one big January purchase, your January would look expensive and your summer would look free. The honest picture comes from spreading the cost across the months you actually use the gym — exactly what an adjusting entry does for prepaid rent or supplies.
Where the picture stops working
The gym analogy covers prepayments, but adjustments do more than spread costs: they also add things cash never touched, like wages owed but unpaid or work done but not yet billed. And unlike a gym membership, adjusting entries follow rules about which accounts move and when — not how a person feels about fairness.
Worked example
Maple Row Studio rents its workshop for $1,800 per month, paid quarterly in advance. On April 1 it pays $5,400, recorded as prepaid rent. By April 30, one month — $1,800 — has been used, so the adjusting entry increases rent expense by $1,800 and decreases prepaid rent by $1,800. The studio also owes its two assistants $2,200 in wages for the last week of April, payable May 1: an accrued expense, recorded as wages expense up and wages payable up. And it finished a $950 design job on April 28 without billing yet: accrued revenue, recorded as accounts receivable up and service revenue up. After the three adjustments, April's statements show the real cost of doing business in April — and the rent asset on the balance sheet is down to $3,600, the two months still to come.
Key takeaway
Adjusting entries are how the books tell the truth about a period: they capture the gradual activity that never triggered an entry, so the statements show what really happened.
Quick check
3 questions here, of 5 in this lesson’s practice set. Answers stay hidden until you check.
A bakery bought $600 of flour and baking supplies in May. By May 31 it had used $180 worth, but no journal entry recorded the usage. Why not?
Choose an answer, then check it.
At the end of June, Valley Lawn Care had finished mowing a client's lawn but had not yet sent a bill or received payment. Which type of adjusting entry records this?
Choose an answer, then check it.
Study tools & related lessonsYou’ll learn to · Common mistakes · Easily confused · Key vocabulary · Related
You’ll learn to
- Define adjusting entries as journal entries made at the end of an accounting period to record transactions not yet captured in the books, using the working definition from OpenStax's Principles of Accounting.
- Explain why adjusting entries exist: gradual events like using supplies, consuming prepaid rent, and earning unpaid wages trigger no entry during the period because they produce no source document.
- Name the common types of adjusting entries — prepayments used up, accrued expenses, and accrued revenue — with one original example of each.
- Describe when adjusting entries happen in the accounting cycle: after the trial balance and before the financial statements.
- Distinguish adjusting entries from closing entries: adjusting corrects the period's balances, while closing resets the accounts for the next period.
- Explain the honest framing: adjustments are how accountants make the statements tell the truth about a period.
Common mistakes
Treating adjusting entries as error corrections.
Adjustments record real activity that was never captured; a genuine mistake — a wrong amount or a misfiled transaction — gets a correcting entry. Mixing the two hides both problems.
Putting cash in an adjusting entry.
Adjusting entries move amounts between income statement and balance sheet accounts; the cash side was recorded when the payment happened. An adjusting entry that touches cash usually means the original transaction was recorded twice.
Adjusting only when something looks wrong.
Adjustments are a matter of routine, not of suspicion: they happen every period, even a quiet one, because gradual events like using supplies and accruing wages never stop.
Confusing adjusting entries with closing entries.
Adjusting updates the period's balances before the statements; closing zeroes out revenue and expense accounts after the statements so the next period starts fresh. Doing one in place of the other leaves the books either unfinished or reset too early.
Easily confused
Adjusting entries vs. Closing entries
Adjusting entries add missing activity so the current period's statements are accurate; closing entries reset revenue and expense accounts to zero after the statements so the next period starts fresh.
Prepaid expense vs. Unearned revenue
A prepaid expense is an asset for what the business has already paid for and will use; unearned revenue is a liability for what the business still owes customers after being paid in advance. Both are adjusted as time passes.
Accrued expense vs. Accrued revenue
An accrued expense is a cost incurred but unpaid, creating a payable; accrued revenue is income earned but uncollected, creating a receivable. Both record activity before cash moves.
Key vocabulary
- Adjusting entries
- Journal entries made at the end of an accounting period to record transactions and events the books have not yet captured; the definition guiding this lesson comes from OpenStax's Principles of Accounting.
- Accounting period
- The stretch of time — often a month, quarter, or year — over which a business records activity and reports results before the cycle begins again.
- Prepaid expense
- An asset created when a business pays for something in advance, such as supplies, rent, or insurance; the used-up portion becomes an expense at period end.
- Unearned revenue
- A liability created when a customer pays before the business delivers the goods or service; it becomes revenue as the business performs.
- Accrued expense
- A cost incurred in the period but not yet recorded or paid, such as wages earned but unpaid or interest that has accumulated on a loan.
- Accrued revenue
- Income earned in the period but not yet recorded or collected, such as services completed but not yet billed to the customer.
- Closing entries
- Entries made after the financial statements that zero out revenue and expense accounts so the next accounting period starts fresh.
Sources & references
- Principles of Accounting, Volume 1: Financial Accounting, Section 4.2: Discuss the Adjustment Process and Illustrate Common Types of Adjusting Entries — OpenStax, Rice University
- Adjusting Journal Entries in Accrual Accounting — Types — Corporate Finance Institute (CFI)
- Principles of Accounting, Volume 1: Financial Accounting, Section 4.1: Explain the Concepts and Guidelines Affecting Adjusting Entries — OpenStax, Rice University
- Principles of Accounting, Volume 1: Financial Accounting, Section 3.3: Define and Describe the Initial Steps in the Accounting Cycle — OpenStax, Rice University
- Accounting Cycle — 8 Steps in the Accounting Cycle, Diagram, Guide — Corporate Finance Institute (CFI)
EliExplains lessons are original prose written from the open, credible references above. See Copyright & Licensing.
Researched 2026-08-21
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