Definition

Noun: An adjusting entry is a journal entry made in an accounting system at the end of an accounting period. Its primary purpose is to allocate revenues and expenses to the period in which they actually occurred, ensuring that financial statements comply with the accrual basis of accounting and the matching principle. It updates account balances before financial statements are prepared.

Usage

Adjusting entries are required to recognize income or expenses in the correct period, regardless of when cash is received or paid. They typically involve accrued revenues, accrued expenses, deferred revenues (unearned revenues), deferred expenses (prepaid expenses), and depreciation.

Examples

• The accountant made an adjusting entry to record one month's worth of depreciation on the office equipment.
• Before closing the books, we must post the adjusting entry for the accrued interest on the loan.
• An adjusting entry is necessary to recognize the portion of the prepaid insurance that has expired this period.

Advanced Usage

• Types of Adjusting Entries: Common categories include accruals (for revenues/expenses incurred but not yet recorded) and deferrals (for items where cash has been exchanged but the revenue/expense has not yet been earned/incurred).
• Reversing Entry: Some adjusting entries, particularly for accruals, may be reversed at the beginning of the next accounting period to simplify the recording of the subsequent cash transaction.

Variants and Related Words

• Adjustment (n): The act or process of adjusting; an adjusting entry itself is often referred to as an "adjustment."
  • We need to make an adjustment to the utilities expense account.
• Accrual (n): An accounting method where revenues and expenses are recorded when they are earned or incurred, not when cash is exchanged. Adjusting entries are essential for accrual accounting.
• Closing Entry (n): A journal entry made at the end of an accounting period to transfer balances from temporary accounts (like revenues and expenses) to permanent accounts (like retained earnings). This is a separate, subsequent step to making adjusting entries.

Synonyms

• Accrual Entry (Specifically for entries recording accrued revenues or expenses).
• Year-End Adjustment (When made at the conclusion of an annual fiscal period).

Related Phrases

• To make/post an adjusting entry: The action of recording the entry in the journal and ledger.
  • The bookkeeper will post the adjusting entry for salaries payable.
• Adjusting journal entry (AJE): A full, formal term for an adjusting entry.
  • All AJEs must be approved by the controller before the financial statements are issued.

Noun

1. an accounting entry made at the end of an accounting period to allocate items between accounting periods