8 Essential Adjusting Entries Example Scenarios for 2026

Closing the books each month is more than just categorizing transactions; it’s about painting an accurate picture of your business’s financial health. Under accrual accounting, timing is everything. Revenue is recognized when it’s earned, and expenses are recorded when they’re incurred, regardless of when cash changes hands. This crucial distinction is managed through adjusting journal entries.

These are the essential, behind-the-scenes corrections that align your financial statements with reality, ensuring your revenue, expenses, assets, and liabilities are reported in the correct period. Without them, your profit and loss statement could be misleading, and your balance sheet inaccurate, leading to flawed strategic decisions.

This guide provides 8 critical adjusting entries example scenarios, complete with the ‘why,’ the ‘how,’ and the strategic impact on your service business. We’ll break down each entry, from accrued expenses and unearned revenue to depreciation, giving you a replicable framework for a precise and insightful month-end close. Consider this your tactical playbook for achieving financial clarity. You will learn not just the debit and credit mechanics, but also the strategic reasoning behind each adjustment, empowering you to maintain truly accurate and reliable financial records.

1. Accrued Expenses Adjusting Entry

Accrued expenses are costs a business has incurred but has not yet paid or received an invoice for by the end of an accounting period. Recording these expenses is a crucial adjusting entry example because it upholds the matching principle, ensuring expenses are recognized in the same period as the revenues they helped generate. This practice provides a more accurate picture of a company’s profitability and financial obligations.

For service-based businesses, common accrued expenses include employee wages earned but not yet paid, contractor fees for completed work, or utility costs for the month before the bill arrives. Ignoring these can significantly understate expenses and overstate net income.

Strategic Breakdown & Example

Let’s analyze a common scenario: a marketing agency uses a freelance graphic designer who completed a $5,000 project in December but won’t send the invoice until January.

• The Problem: Without an adjusting entry, the $5,000 expense would be recorded in January, incorrectly matching it with January’s revenue and inflating December’s profit.

• The Solution: An adjusting journal entry is made on December 31st.

  • Debit: Contractor Expense for $5,000 (Increases expenses)
  • Credit: Accrued Expenses Payable for $5,000 (Increases liabilities)

This entry correctly places the expense in December, reflecting the true cost of operations for that period. The “Accrued Expenses Payable” account on the balance sheet shows the company’s obligation to pay for the service.

Actionable Takeaways & Workflow Integration

To master accrued expenses, businesses should implement a structured process during their month-end close.

• Maintain an Accrual Log: Keep a running list of all services received or hours worked by contractors and employees that have not yet been invoiced or paid.
• Automate Predictable Accruals: For consistent costs like estimated utilities or software subscriptions billed quarterly, use the recurring journal entry feature in QuickBooks Online.
• Schedule Reversals: Set a reminder or create a reversing entry dated for the first day of the next month (e.g., January 1st). This clears the accrued liability so that when the actual invoice is paid, it can be processed normally without duplicating the expense. This is a critical step often missed by business owners.

2. Accrued Revenue/Income Adjusting Entry

Accrued revenue is income a business has earned by providing goods or services but has not yet billed or collected from the client by the end of an accounting period. This adjusting entry is essential for upholding the revenue recognition principle, which dictates that revenue should be recorded when it is earned, regardless of when cash is received. Recognizing earned income promptly provides a more accurate reflection of a company’s operational performance.

For service-based businesses like consulting firms, creative agencies, or tax preparers, accrued revenue is a frequent occurrence. For instance, a project might be completed in the last week of the month, with the invoice not scheduled to go out until the first week of the next month. Failing to record this earned income understates revenue and net income for the current period. Understanding the difference between cash basis and accrual basis accounting is key to grasping this concept.

Strategic Breakdown & Example

Let’s consider a bookkeeping firm that completes $12,000 worth of services for various clients in December but, due to billing cycles, won’t invoice them until January.

• The Problem: Without an adjusting entry, the $12,000 in revenue would be recorded in January. This would inaccurately match December’s hard work with January’s financial results, understating December’s true performance.

• The Solution: An adjusting journal entry is made on December 31st.

  • Debit: Accounts Receivable for $12,000 (Increases assets)
  • Credit: Service Revenue for $12,000 (Increases revenue)

This entry correctly recognizes the revenue in December when it was earned. The “Accounts Receivable” account on the balance sheet now reflects the money owed to the company, providing a clearer picture of its assets.

Actionable Takeaways & Workflow Integration

To accurately manage accrued revenue, businesses should systematize their month-end close process.

• Implement Robust Time Tracking: Use time-tracking software to precisely document all billable work performed up to the last day of the month. This provides the data needed to calculate accrued revenue.
• Review Unbilled Work Reports: At month-end, run a “Work in Progress” or “Unbilled Time” report from your project management or billing software to identify all earned but un-invoiced revenue.
• Automate Invoicing: Schedule invoices for accrued revenue to be sent out on the first day of the new period. This ensures prompt billing and improves cash flow. In QuickBooks Online, you can create these invoices ahead of time and date them for the start of the next month.

3. Prepaid Expenses Adjusting Entry

Prepaid expenses are assets representing payments made in advance for goods or services that will be consumed in future accounting periods. This type of adjusting entries example is vital for upholding the matching principle by ensuring the expense is recognized in the period it is used, not when it was paid. This prevents a single large payment from drastically skewing one month’s financial results and provides a more accurate view of monthly profitability.

Common examples for service businesses include annual insurance premiums, yearly software subscriptions like QuickBooks or Gusto, rent paid for several months upfront, or bulk purchases of office supplies. Initially recorded as an asset, a portion of this prepayment is moved to an expense account each period as the benefit is realized.

Strategic Breakdown & Example

Let’s consider a consulting firm that pays its annual business liability insurance premium of $12,000 on January 1st.

• The Problem: If the entire $12,000 is expensed in January, the company’s profit for that month will appear artificially low, while profits for the following eleven months will be overstated. The asset (the right to insurance coverage for a year) is not properly reflected.

• The Solution: An adjusting journal entry is made at the end of each month to recognize the portion of the insurance that has been “used up.”

  • Debit: Insurance Expense for $1,000 (Increases expenses)
  • Credit: Prepaid Insurance for $1,000 (Decreases assets)

This entry correctly allocates $1,000 of the insurance cost to each month, accurately matching the expense to the period it covers and gradually reducing the prepaid asset on the balance sheet.

Actionable Takeaways & Workflow Integration

Effectively managing prepaid expenses requires a systematic approach during your month-end close process.

• Create a Prepaid Schedule: Maintain a spreadsheet listing all prepaid items, payment dates, total amounts, and the calculated monthly expense. This serves as a master guide for your adjusting entries.
• Automate Monthly Entries: Use the recurring journal entry feature in your accounting software, like QuickBooks Online, to automatically post the monthly expense adjustment. This ensures consistency and saves time.
• Regularly Reconcile: Each month, review the balance in your prepaid expense accounts against your schedule. This helps catch any discrepancies and ensures the balance accurately reflects the remaining future benefit.

4. Depreciation Expense Adjusting Entry

Depreciation is the process of allocating the cost of a tangible asset, like equipment or vehicles, over its useful life. Recording depreciation expense is a vital adjusting entry example because it adheres to the matching principle, pairing the cost of using the asset with the revenues it helps generate each period. This prevents the entire asset cost from distorting profits in the year of purchase and provides a truer sense of operational profitability.

For service businesses, this is crucial for assets like computers, office furniture, software, and company vehicles. Failing to record depreciation understates a company’s true operating expenses and overstates the book value of its assets on the balance sheet, leading to a skewed financial picture.

Strategic Breakdown & Example

Let’s analyze a typical scenario: a consulting firm purchases new office furniture for $15,000 with an estimated useful life of five years (60 months) and no salvage value. The firm uses the straight-line depreciation method.

• The Problem: Without an adjusting entry, the firm’s assets would be overstated by $15,000, and its monthly expenses would be understated, inflating net income.

• The Solution: An adjusting journal entry is made at the end of each month to recognize the expense. The monthly depreciation is calculated as $15,000 / 60 months = $250.

  • Debit: Depreciation Expense for $250 (Increases expenses)
  • Credit: Accumulated Depreciation – Furniture for $250 (Increases this contra-asset account)

This entry correctly recognizes a portion of the furniture’s cost as an expense for the month. “Accumulated Depreciation” is a contra-asset account that reduces the book value of the furniture on the balance sheet without directly changing the original cost.

Actionable Takeaways & Workflow Integration

To properly manage depreciation, businesses should systematize their fixed asset accounting during the month-end close.

• Maintain a Fixed Asset Register: Create a detailed spreadsheet or use accounting software to track each asset’s purchase date, cost, useful life, and depreciation method. This is the foundation for accurate calculations.
• Use QuickBooks Fixed Asset Manager: QuickBooks Online has features to help track assets and calculate depreciation, which can be configured to post the recurring journal entry automatically each month.
• Consult a CPA on Tax Methods: Discuss tax-specific depreciation methods like Section 179 or bonus depreciation. These can offer significant tax advantages but have different rules than book depreciation, so it is crucial to understand how to prepare financial statements for both internal and tax purposes.

5. Unearned Revenue Adjusting Entry

Unearned revenue, also known as deferred revenue, is the money a business receives from a customer for goods or services that have not yet been delivered. This is another essential adjusting entries example because it follows the revenue recognition principle, stating that revenue should only be recorded when it is earned, regardless of when the cash is received. This prevents overstating revenue and provides a true measure of a company’s performance in a given period.

For service businesses, unearned revenue is common with annual retainer contracts, subscription services, or advance deposits for future projects. Initially, this advance payment is recorded as a liability on the balance sheet because the company owes a service to the client.

Strategic Breakdown & Example

Let’s analyze a typical scenario: a bookkeeping firm receives a $30,000 annual retainer from a client on January 1st to cover services for the entire year.

• The Problem: If the full $30,000 is recorded as revenue in January, it massively inflates January’s income and understates revenue for the following eleven months, distorting the company’s monthly financial performance.

• The Solution: At the end of each month, an adjusting journal entry is made to recognize the portion of revenue that has been earned. The monthly earned amount is $30,000 / 12 = $2,500.

  • Debit: Unearned Revenue for $2,500 (Decreases liabilities)
  • Credit: Service Revenue for $2,500 (Increases revenue)

This entry correctly recognizes $2,500 of revenue each month, accurately reflecting the services provided during that period. The remaining balance in the Unearned Revenue account shows the obligation the firm still has to its client.

Actionable Takeaways & Workflow Integration

To accurately manage unearned revenue, businesses must establish a clear and repeatable month-end process.

• Maintain a Deferred Revenue Schedule: Create a spreadsheet that tracks all prepaid contracts, including the total amount, start date, end date, and the monthly amount to be recognized.
• Automate Recognition: Use the recurring journal entry feature in accounting software like QuickBooks Online to automatically record the monthly revenue recognition, reducing the risk of manual error.
• Regularly Review the Liability Account: At each month-end close, review the Unearned Revenue liability account balance. Ensure it accurately reflects the remaining services or goods owed to all clients with prepaid contracts.

6. Allowance for Doubtful Accounts Adjusting Entry

The allowance for doubtful accounts is a contra-asset account used to estimate the portion of accounts receivable that a business expects it will not be able to collect. This adjusting entry is vital for adhering to the matching principle, as it records bad debt expense in the same period the related revenue was earned, not when the specific invoice is finally deemed uncollectible. For service businesses that rely on invoicing, this provides a much more realistic valuation of receivables on the balance sheet.

Ignoring potential bad debts can lead to an overstatement of assets (accounts receivable) and net income. By proactively creating an allowance, a company presents a more conservative and accurate financial position, which is critical for making informed decisions about cash flow and credit policies.

Strategic Breakdown & Example

Consider a consulting firm that has $100,000 in accounts receivable at the end of the year. Based on historical data, the company knows that approximately 5% of its receivables typically go uncollected.

• The Problem: Without an adjustment, the balance sheet would show $100,000 in receivables, implying all of it is collectible. This would overstate the company’s assets and understate its expenses for the period.

• The Solution: An adjusting journal entry is made on December 31st to estimate the bad debt.

  • Debit: Bad Debt Expense for $5,000 (Increases expenses)
  • Credit: Allowance for Doubtful Accounts for $5,000 (Increases this contra-asset account)

This entry recognizes the expense in the correct period and reduces the net realizable value of accounts receivable to a more accurate $95,000 on the balance sheet.

Actionable Takeaways & Workflow Integration

To effectively manage uncollectible accounts, integrate this process into your regular financial review.

• Run A/R Aging Reports: Regularly use QuickBooks to generate an accounts receivable aging report. This report categorizes outstanding invoices by how long they are past due (e.g., 1-30 days, 31-60 days, etc.) and is a key tool for estimating your allowance.
• Establish an Estimation Method: Choose a consistent method for calculating your allowance. Common approaches include applying a flat percentage to total receivables (like the example above) or using an aging schedule where higher percentages are applied to older, riskier invoices.
• Document Write-Offs: When an invoice is confirmed as uncollectible, it is written off by debiting the Allowance for Doubtful Accounts and crediting Accounts Receivable. This action does not impact the income statement at the time of write-off, as the expense was already recognized through the adjusting entry.

7. Interest Expense Adjusting Entry

Interest expense adjusting entries record interest that has accrued on business loans, lines of credit, or other debt obligations but has not yet been paid by the end of an accounting period. For businesses that utilize financing for equipment or operations, interest accrues daily but is often paid monthly. This adjusting entry example is vital for correctly applying the matching principle, ensuring the cost of borrowing is recognized in the period it was incurred, not just when cash is paid.

Failing to accrue interest expense can understate a company’s liabilities and expenses, leading to an overstatement of net income. This gives a misleading impression of profitability and financial health, particularly for businesses with significant debt. Proper accrual ensures the financial statements accurately reflect the true costs of financing operations during the period.

Strategic Breakdown & Example

Consider a consulting firm that took out a $100,000 business loan at a 4% annual interest rate. The interest is paid monthly, but the end of the accounting period (December 31st) falls before the next payment is due. The monthly interest is $333 ($100,000 * 4% / 12).

• The Problem: Without an adjusting entry, the $333 interest expense for December would not be recorded until the payment is made in January. This would understate December’s expenses and overstate its profit.

• The Solution: An adjusting journal entry is made on December 31st to recognize the accrued interest.

  • Debit: Interest Expense for $333 (Increases expenses)
  • Credit: Interest Payable for $333 (Increases liabilities)

This entry correctly matches the cost of borrowing with the period it benefited. The “Interest Payable” account on the balance sheet clearly shows the company’s obligation for the interest incurred.

Actionable Takeaways & Workflow Integration

To ensure accurate interest expense reporting, businesses should integrate these steps into their financial management workflow.

• Create a Debt Schedule: Maintain a detailed schedule of all loans, including principal balances, interest rates, and payment dates. This serves as a central reference for month-end accruals.
• Automate in QuickBooks: Utilize the loan management or recurring journal entry features in QuickBooks Online to automate the recording of monthly interest expense, reducing the risk of manual error.
• Regularly Reconcile: As part of the month-end close process, review and reconcile the Interest Payable account and Interest Expense account against loan statements from your lender to ensure accuracy.

8. Income Tax Expense Adjusting Entry

Income tax expense adjusting entries record the estimated tax liability for the current accounting period based on projected taxable income. For corporations subject to income tax, this entry is vital because it accrues the tax obligation throughout the year, rather than recording it as a lump sum when paid or when the tax return is filed. This process aligns with the matching principle, ensuring that the expense of generating income (taxes) is recognized in the same period as the income itself.

Without this adjustment, a company’s net income would be artificially inflated on interim financial statements, providing a misleading view of its true after-tax profitability. This particular adjusting entries example is essential for accurate financial reporting and strategic tax planning.

Strategic Breakdown & Example

Let’s consider a C-corporation that projects a quarterly taxable income of $34,000 and estimates its effective tax rate to be 25%.

• The Problem: The company owes tax on the income earned during the quarter. If this expense isn’t recorded until the tax payment is made, the financial statements for that quarter will overstate net income and understate liabilities.

• The Solution: An adjusting journal entry is made at the end of the quarter.

  • Debit: Income Tax Expense for $8,500 ($34,000 x 25%) (Increases expenses)
  • Credit: Income Tax Payable for $8,500 (Increases liabilities)

This entry correctly reflects the tax expense on the income statement, reducing the period’s net income. On the balance sheet, the “Income Tax Payable” account shows the company’s current obligation to the government, providing a more complete financial picture.

Actionable Takeaways & Workflow Integration

Accurately accruing for income tax requires a proactive and organized approach, especially during your financial close.

• Consult a Tax Professional: Work with your CPA to determine an accurate estimated effective tax rate. This rate should account for federal and state taxes, as well as any expected tax deductions or credits.
• Update Estimates Quarterly: Business performance fluctuates. Review your income and tax estimates each quarter and adjust your accruals accordingly to avoid significant year-end surprises.
• Coordinate Payments and Accruals: Ensure that your estimated tax payments are reconciled against the “Income Tax Payable” liability account. This is a critical step in a well-managed month-end close process that prevents misstatements.

8 Adjusting Entries Comparison

Adjusting Entry	🔄 Implementation Complexity	⚡ Resource Requirements	📊 Expected Outcomes	Ideal Use Cases	⭐ Key Advantage	💡 Quick Tip
Accrued Expenses Adjusting Entry	Medium — requires month‑end estimates and reversals	Low–Medium — tracking logs, accounting software	Timely expense recognition; improved P&L accuracy	Service firms with unpaid month‑end costs (wages, utilities, contractors)	Ensures GAAP matching of expenses to period ⭐	Keep detailed unbilled expense logs; use recurring entries
Accrued Revenue/Income Adjusting Entry	Medium — needs reliable time/project tracking	Medium — AR tracking, invoicing systems	Recognizes earned revenue; increases AR visibility	Consultants, contractors, agencies with unbilled work	Reflects true earned revenue (not cash) ⭐	Implement time tracking and invoice accrued revenue promptly
Prepaid Expenses Adjusting Entry	Low–Medium — systematic allocation per period	Low — prepaid schedule, possible automation	Converts prepaid assets to period expenses; prevents asset overstatement	Annual subscriptions, insurance, prepaid rent	Consistent expense matching across periods ⭐	Create a prepaid schedule and automate monthly adjustments
Depreciation Expense Adjusting Entry	Medium–High — estimates of useful life and method selection	Medium — fixed asset register, depreciation tool	Spreads cost over useful life; realistic balance sheet values	Businesses with equipment, furniture, software assets	Tax deductions and accurate asset valuation ⭐	Maintain an asset register and review useful lives quarterly
Unearned Revenue Adjusting Entry	Low–Medium — tracking delivery vs. prepayment	Low–Medium — contract schedule, revenue recognition rules	Moves earned amounts from liability to revenue; prevents premature revenue	Retainers, subscriptions, prepaid service contracts	Prevents over‑reporting revenue; shows obligations ⭐	Use a contract schedule and define service milestones
Allowance for Doubtful Accounts Adjusting Entry	Medium — requires historical analysis/aging	Medium — AR aging reports, historical write‑offs	Realistic net receivables; highlights collection risk	Firms with significant receivables or past write‑offs	Improves accuracy of collectible revenue estimates ⭐	Review aging regularly and calibrate allowance percentages
Interest Expense Adjusting Entry	Low–Medium — daily accruals for loans/lines	Low — loan schedules, rate tracking	Matches financing cost to period; aids cash flow planning	Businesses with loans, equipment financing, credit lines	Reveals true cost of borrowing and debt burden ⭐	Maintain debt schedule and reconcile interest monthly
Income Tax Expense Adjusting Entry	High — requires tax estimates and jurisdictional knowledge	High — CPA input, tax planning tools	Reflects estimated tax burden; accurate after‑tax income	Corporations and entities with periodic tax obligations	Provides realistic net income and supports tax planning ⭐	Coordinate estimates with your CPA and update quarterly

From Theory to Practice: Implementing Adjusting Entries in Your Workflow

Navigating the nuances of accrual accounting can seem complex, but as we’ve demonstrated, the process is built on a logical foundation. By breaking down each adjusting entries example, from recognizing accrued expenses to accounting for unearned revenue, you can see a clear pattern emerge. The core principle is always the same: ensuring your financial statements accurately reflect your company’s performance and position for a specific period, regardless of when cash changes hands. This isn’t just a bookkeeping chore; it’s a strategic necessity for sound financial management.

Mastering these entries transforms your financial data from a simple record of transactions into a powerful tool for insight. Each adjustment provides a more precise picture of your profitability and operational efficiency, enabling you to make informed decisions about budgeting, resource allocation, and growth strategies. Without them, your profit and loss statement could be misleadingly optimistic or pessimistic, and your balance sheet wouldn’t represent the true economic resources and obligations of your business.

Key Takeaways and Actionable Next Steps

To move from understanding these concepts to implementing them effectively, focus on building a systematic and repeatable process. Here are the most critical takeaways and your next steps:

• Develop a Month-End Close Checklist: Don’t leave adjustments to memory. Create a formal checklist that includes reviewing potential accrued revenues, identifying unrecorded expenses, calculating depreciation, and assessing prepaid assets. This systematic approach ensures consistency and completeness every single month.
• Leverage Technology Strategically: While manual journal entries are fundamental, modern accounting platforms are designed to streamline this process. For those looking to implement adjusting entries efficiently, exploring robust Cloud Accounting Solutions can provide a strategic advantage. These tools often feature recurring journal entry templates and automated depreciation schedules, which reduce manual error and save significant time.
• Focus on Materiality: Not every tiny adjustment is necessary. Work with your accountant or CPA to establish a materiality threshold. This allows your team to focus on the adjustments that have a meaningful impact on your financial statements, improving efficiency without sacrificing accuracy.
• Review, Reconcile, and Repeat: The month-end close isn’t complete once the entries are posted. The final step is to review the adjusted trial balance and resulting financial statements for anything that looks unusual. Does the reported net income make sense? Are the balance sheet accounts in line with expectations? This critical review is your final defense against errors.

Ultimately, the consistent application of adjusting entries is what separates reactive bookkeeping from proactive financial management. It’s the engine that powers accrual accounting and provides the reliable data needed to steer your business with confidence. By building a disciplined month-end process around the examples we’ve covered, you are investing in the financial clarity and integrity of your company, setting a solid foundation for sustainable growth.

---

Ready to ensure your books are always accurate and decision-ready? At Steingard Financial, we specialize in implementing rock-solid bookkeeping and month-end close processes for service businesses, taking the complexity of adjusting entries off your plate. Visit Steingard Financial to learn how we can transform your financial data into a reliable tool for growth.