An adjusting entry is a critical accounting step for ensuring financial statements are precise, especially under accrual accounting. Adjustments recorded at the period end help align revenue and expense recognition with actual economic activity.
Why Adjusting Entry Matters
Without proper adjusting entries, the financial statement accuracy can decline resulting in overstated assets, understated liabilities, or misstated profitability. This guide covers everything from types of adjusting entries to automation, ERP, month-end close, and real examples.
Fundamentals of Adjusting Entries in Accounting
What Is an Adjusting Journal Entry?
An adjusting journal entry updates account balances at period close so that revenues and expenses match the correct accounting period. These entries typically involve non-cash movements and ensure compliance with accrual accounting.
Why Adjusting Entries Are Necessary
- Supports the matching principle.
- Enforces proper revenue recognition.
- Updates estimates such as depreciation and bad debt.
- Corrects unrecorded obligations or receivables.
When Adjusting Entries Are Recorded
Adjusting entries are made during month-end, quarter-end, or year-end close—just before preparing the adjusted trial balance and financial statements.
Types of Adjusting Entries
Classification of Adjusting Entries
Adjusting entries fall into three categories: accruals, deferrals, and estimates. Some accounting systems also include reclassification adjustments.
Accruals: Accrued Revenues and Expenses
- Accrued revenue adjusting entries
- Accrued expenses journal entry
Deferrals: Prepaid Expenses and Deferred Revenue
- Prepaid expenses adjustment
- Deferred revenue adjusting entry
Estimates: Depreciation and Bad Debt
- Depreciation adjusting entry
- Bad debt adjusting entries and allowance for doubtful accounts
Adjusting Entries in Practical Accounting Scenarios
Adjusting Entries in Accounts Receivable
These include accrued revenue, bad debt provisions, and allowance for doubtful accounts. Adjustments ensure AR reflects collectible value.
Order to Cash Adjusting Entries
Entries may include unbilled revenue, deferred revenue, and recognition tied to fulfillment milestones in the order-to-cash cycle.
Adjustments for Prepaid Expenses
Prepaid insurance, rent, or service fees must be expensed over the period they relate to.
Accrued Expenses and Deferred Revenue
Accruals record obligations incurred but unpaid. Deferred revenue shifts upfront customer payments into earned revenue gradually.
Depreciation and Bad Debt Allowance
Depreciation allocates asset value over time, while bad debt estimates maintain realistic AR values.
Month-End and Year-End Close Adjustments
The Accounting Cycle and Period-End Adjustments
Adjustments help move from an unadjusted trial balance to an accurate adjusted trial balance before financial reporting.
Dual Review and Internal Controls
Approval workflows reduce error risk and support compliance with accounting standards.
Reversing Adjusting Entries
Reversing entries reduce complexity by undoing certain accruals at the start of the new period.
Common Errors, Risks, and Compliance in Adjusting Entries
Adjusting Entry Errors and Controls
Misclassifications, incorrect estimates, and missed accruals are common issues that strong controls can prevent.
Compliance With Accounting Standards
Adjustments must follow GAAP or IFRS rules to ensure proper reporting and audit readiness.
Challenges in Manual vs Automated Adjusting Entries
Manual processes are slower and prone to errors; automated adjustments improve speed and accuracy.
Close Process Bottlenecks
Manual adjustments can cause delays, last-minute corrections, and extended closing timelines.
Automation and ERP-Driven Adjusting Entries
Adjusting Entries in ERP Systems
ERP platforms streamline adjustments with templates, workflows, and integrated approval paths.
Automation of Adjusting Entry Processes
Automated accruals, depreciation schedules, and recurring entries reduce manual workload.
Machine Learning for Smart Adjustments
ML models assist in forecasting accruals and adjusting estimates using historical patterns.
Reducing Manual Errors Through Automation
Automated validation and audit trails enhance reliability and governance.
Best Practices for Managing Adjusting Entries Effectively
Standardizing an Adjustments Calendar
Scheduling adjustments ensures consistency and eliminates month-end rush.
Defining Policies and Review Workflows
Documented guidelines support accuracy and consistency in estimates and classifications.
Training the Accounting Team
Skilled teams reduce errors, improve estimates, and enhance close efficiency.
Leveraging Analytics and KPIs
KPIs such as estimate variance and entry volume help refine the adjustments process.
How Emagia Helps Streamline Adjusting Entry Management
Emagia’s AI-powered finance platform modernizes adjusting entry processes by automating recurring entries, strengthening controls, and accelerating the month-end close. Integrated workflows connect directly to ERP systems, eliminating spreadsheets and manual reconciliations.
The platform offers predictive analytics for accrual estimates, automated depreciation schedules, approval routing, and real-time dashboards that track entry accuracy, close status, and exceptions.
Real-World Examples and Case Studies
Manufacturing: Prepaid Expenses and Depreciation
Standardized automation reduced manual adjusting entries and improved audit readiness.
Subscription Business: Deferred Revenue
Automated revenue recognition improved accuracy in the order-to-cash cycle.
Retail Chain: Bad Debt and Accrued Liabilities
Predictive bad debt modeling reduced variance between estimated and actual write-offs.
Frequently Asked Questions (FAQs)
What is the difference between an adjusting entry and a regular journal entry?
Regular entries record daily activity; adjusting entries correct or update accounts at the end of a period.
How many types of adjusting entries exist?
Accruals, deferrals, and estimates.
Why are accruals important?
They ensure accurate revenue and expense matching.
What are month-end adjusting entries?
Entries posted at month-end to update balances for accurate reporting.
Can adjusting entries be automated?
Yes, using ERP systems and AI-driven financial tools.
What risks arise from incorrect adjusting entries?
Misstated financial statements, compliance issues, and misleading performance reports.
How do reversing entries work?
They reverse accruals at the start of the next period to simplify bookkeeping.
What tools reduce adjusting entry errors?
ERP automation, machine learning estimates, workflows, and dashboards.
Conclusion
Adjusting entries ensure financial statements reflect true economic activity. By accurately updating unrecorded revenues, expenses, and estimates, companies maintain compliance and financial clarity. Automation and best practices further improve reliability, speed, and auditability.
