Mastering examples of adjusting entries: 8 Essential Journal Practices

Imagine trying to gauge your business's health by only looking at your bank account. You'd miss unpaid client invoices, future expenses you've already paid for, and the true cost of using your assets over time. This incomplete picture is the reality of cash-basis accounting. The bridge to a more accurate financial view is a set of crucial journal entries made at the end of each accounting period. These are called adjusting entries.

They are the engine working behind the scenes to ensure your financial statements, specifically your income statement and balance sheet, reflect economic reality, not just cash movement. Under the accrual basis of accounting, these entries match revenues to the period they are earned and expenses to the period they are incurred, a principle vital for accurate reporting. For service businesses, where project timelines and payment schedules rarely align perfectly, mastering these entries is non-negotiable for true profit measurement and confident decision-making.

Getting these entries right is the foundation for trustworthy financial data. Accurate statements are a prerequisite for any meaningful strategic planning, from securing a loan to evaluating operational efficiency. This data integrity is also essential before you can effectively use advanced tools like AI for financial analysis to uncover deeper insights into your business performance.

This comprehensive guide will walk you through eight critical examples of adjusting entries, providing not just the 'what' and 'why,' but the strategic 'how'. We'll cover everything from accrued expenses and prepaid assets to depreciation, complete with sample journal entries, step-by-step QuickBooks instructions, and actionable insights to build a rock-solid month-end close process.

1. Accrued Expenses (The 'Expense Now, Pay Later' Entry)

Accrued expenses are costs your business has incurred but has not yet paid for or received an invoice for by the end of an accounting period. The core idea is to recognize expenses when they happen, not when cash changes hands, a fundamental concept of accrual accounting. This ensures your financial statements accurately reflect the company's performance within a specific period. For more details on this accounting method, you can learn more about the differences between cash and accrual basis accounting.

Common examples include employee wages earned in the last few days of a month but paid in the next, utility usage that has occurred but hasn't been billed, or contractor services completed right before the period closes. Ignoring these expenses can artificially inflate your net income, providing a misleading picture of profitability.

Example: Contractor Services

Imagine you hired a marketing consultant who completed a $3,000 project for you in the last week of March. However, they don't send you the invoice until April 5th.

• Without an Adjusting Entry: Your March income statement would show zero expense for this work, making your profit appear $3,000 higher than it actually was.
• With an Adjusting Entry: You record the expense in March, matching it to the period in which the service benefited your business.

The adjusting journal entry on March 31st would be:

Account	Debit	Credit
Marketing Expense	$3,000
Accrued Liabilities		$3,000

This entry correctly increases your expenses on the P&L statement and shows a liability on the balance sheet, reflecting your obligation to pay.

Strategic Takeaways & Best Practices

To properly manage accrued expenses, consider these actionable steps:

• Implement a Cut-Off Procedure: Establish a clear process at month-end to identify all services received or goods consumed for which an invoice has not yet arrived.
• Communicate with Vendors: Proactively ask vendors for invoices before the period closes to minimize the need for estimates.
• Use Reversing Entries: In the next period (e.g., April 1st), you would post a reversing entry. This simplifies bookkeeping by ensuring you don't accidentally double-count the expense when the actual invoice is paid.

2. Prepaid Expenses (Deferred Expenses)

Prepaid expenses, also known as deferred expenses, are assets that result from a business paying in advance for goods or services that will be received or used in the future. The core accounting principle here is the matching principle, which dictates that expenses should be recognized in the same period as the revenues they help generate. By initially recording the prepayment as an asset, you can then systematically expense it over the periods it benefits.

Common examples of these adjusting entries include annual insurance premiums, rent paid in advance, or yearly software subscriptions. Failing to make these adjustments would cause your expenses to be overstated in the period of payment and understated in future periods, distorting your company’s true monthly or quarterly profitability.

Example: Annual Insurance Premium

Suppose your business pays a $12,000 premium on January 1st for a one-year liability insurance policy that covers the entire calendar year. The initial payment creates an asset, not an immediate expense.

• Without an Adjusting Entry: Your January income statement would show a massive $12,000 insurance expense, drastically reducing your profit for that month. The following eleven months would show zero insurance expense, making them appear more profitable than they actually were.
• With an Adjusting Entry: You recognize just one month's worth of the insurance cost ($1,000) as an expense in January, and you do the same for each subsequent month.

The adjusting journal entry on January 31st (and at the end of each month) would be:

Account	Debit	Credit
Insurance Expense	$1,000
Prepaid Insurance		$1,000

This entry correctly increases your monthly expenses while reducing the prepaid insurance asset on your balance sheet, accurately reflecting the portion of the policy that has been "used up."

Strategic Takeaways & Best Practices

To effectively manage your prepaid expenses and ensure accurate financial reporting, follow these best practices:

• Maintain a Prepaid Schedule: Create and regularly update a spreadsheet that tracks each prepaid item, its total cost, the amortization period, and the monthly expense amount. This serves as a crucial control document for your month-end close.
• Automate Recurring Entries: For fixed monthly prepaid adjustments like rent or insurance, set up a recurring journal entry in your accounting software. This saves time and reduces the risk of manual error.
• Establish a Capitalization Threshold: Decide on a minimum dollar amount for an item to be treated as a prepaid expense (e.g., $500). Anything below this threshold can be expensed immediately to simplify bookkeeping for immaterial amounts.

3. Depreciation Expense (The 'Asset Usage' Entry)

Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life. Instead of recording the full expense of a major purchase like a vehicle or equipment in one period, depreciation spreads that cost out. This non-cash adjusting entry is crucial for matching the expense of using an asset with the revenue it helps generate over time, a core tenet of accrual accounting.

Common examples in service businesses include computers, office furniture, company vehicles, or significant leasehold improvements. Properly recording depreciation prevents a single period's income from being drastically understated by a large purchase and ensures the asset's value on the balance sheet is reduced over time to reflect its wear and tear. This is one of the most common examples of adjusting entries for businesses with fixed assets.

Example: Company Equipment

Suppose your business purchases new HVAC equipment for its office on January 1st for $50,000. You estimate it will have a useful life of 10 years and no salvage value. Using the simple straight-line method, the annual depreciation is $5,000 ($50,000 / 10 years), or $416.67 per month.

• Without an Adjusting Entry: Your January income statement would show a massive $50,000 expense, severely distorting your profitability for that month. Your balance sheet would continue to show the equipment at its full purchase price, overstating its value.
• With an Adjusting Entry: You record a portion of the cost each month, accurately reflecting the equipment's contribution to generating revenue over time.

The adjusting journal entry on January 31st would be:

Account	Debit	Credit
Depreciation Expense	$416.67
Accumulated Depreciation		$416.67

This entry increases expenses for the period and increases Accumulated Depreciation, a contra-asset account that reduces the book value of the equipment on the balance sheet. This process is a foundational part of the double-entry accounting system.

Strategic Takeaways & Best Practices

To effectively manage depreciation, implement these best practices:

• Maintain a Fixed Asset Register: Keep a detailed log of all fixed assets, including purchase date, cost, useful life, and depreciation method. This is critical for accuracy and audit purposes.
• Standardize Your Method: Use the straight-line method for simplicity and consistency in your financial statements. Consult a CPA for tax-specific depreciation methods (like MACRS) that can optimize deductions.
• Automate Calculations: Use your accounting software (like QuickBooks) to set up depreciation schedules that automatically calculate and post the monthly adjusting entries, reducing manual errors.
• Distinguish Capital vs. Expense: Create a clear policy to differentiate between capital improvements that should be depreciated (e.g., an engine replacement) and routine repairs that should be expensed immediately (e.g., an oil change).

4. Unearned Revenue (The 'Get Paid Now, Work Later' Entry)

Unearned revenue, also known as deferred revenue, represents cash received from a customer for services or products you have not yet delivered or earned. According to the revenue recognition principle, you can only record revenue once it's earned. Therefore, this advance payment is initially recorded as a liability on your balance sheet, signifying your obligation to the customer. As you deliver the service or product over time, you make adjusting entries to recognize the earned portion as revenue.

Common examples of adjusting entries for unearned revenue include annual software subscriptions paid upfront, retainers for legal or consulting services, and deposits for future projects. Failing to defer this revenue would overstate your income in the period you receive the cash and understate it in the periods you actually perform the work, skewing your profitability metrics.

Example: Annual Software Subscription

Suppose your company sells a software subscription and a customer pays $12,000 on January 1st for a full year of service. You cannot recognize the full $12,000 as revenue in January because you haven't provided the service for the entire year yet.

• Without an Adjusting Entry: Your January income statement would show $12,000 in revenue, artificially inflating that month's profit. The subsequent 11 months would show zero revenue from this customer, providing a distorted view of your performance.
• With an Adjusting Entry: Each month, you recognize the portion of the service you have delivered. In this case, you would recognize $1,000 ($12,000 / 12 months) of revenue per month.

The adjusting journal entry on January 31st would be:

Account	Debit	Credit
Unearned Revenue	$1,000
Service Revenue		$1,000

This entry correctly reduces the liability on your balance sheet and increases the recognized revenue on your P&L statement, reflecting the value delivered during January.

Strategic Takeaways & Best Practices

To effectively manage unearned revenue, implement the following strategies:

• Maintain a Deferred Revenue Schedule: Create a detailed schedule that tracks each customer, the total amount paid, the service period, and the amount to be recognized each month. This is crucial for accuracy.
• Automate Recognition: For simple, consistent contracts like monthly subscriptions, set up recurring journal entries in your accounting software to automate the revenue recognition process.
• Document Service Delivery: For project-based work, meticulously document service milestones, delivery dates, or hours worked to provide clear support for the timing of revenue recognition.

5. Accrued Revenue (The 'Earn Now, Bill Later' Entry)

Accrued revenue, often recorded as accounts receivable, is income that your business has earned by providing goods or services but has not yet invoiced or received payment for by the end of an accounting period. The purpose of this adjusting entry is to recognize revenue in the period it was actually earned, aligning with the revenue recognition principle. This practice prevents the understatement of revenue and provides a more accurate view of your company's financial health.

This is a common scenario for service-based businesses, such as consultancies, law firms, or marketing agencies, that complete work for a client but send the invoice in the following month. Failing to record accrued revenue can make a profitable month look weak, distorting performance analysis and potentially impacting business decisions.

Example: Consulting Services

Suppose your consulting firm completes a project for a client on June 30th, earning a total of $5,000. Due to your billing cycle, the invoice for this work is not sent until July 7th.

• Without an Adjusting Entry: Your June income statement would not include this $5,000, making your revenue and net income appear artificially low for that period.
• With an Adjusting Entry: You correctly record the revenue in June, the month you performed the service and earned the income.

The adjusting journal entry on June 30th would be:

Account	Debit	Credit
Accounts Receivable	$5,000
Service Revenue		$5,000

This entry increases your revenue on the income statement and increases accounts receivable (an asset) on the balance sheet, reflecting the money your client owes you.

Strategic Takeaways & Best Practices

To accurately manage accrued revenue, implement these systematic processes:

• Establish a Clear Cut-Off: Create a firm month-end process to review all ongoing projects and services. Identify any work completed but not yet invoiced to ensure it's captured in the correct period.
• Leverage Project Management Tools: Use time-tracking or project management software to document service delivery dates and completion milestones. This data provides the necessary evidence for creating accurate accrual entries.
• Systematize Invoicing: While accruals are necessary, aim to minimize them by maintaining a disciplined invoicing schedule. Promptly billing clients upon project completion can reduce the volume of required adjustments.
• Use Reversing Entries: On the first day of the next period (July 1st), you can post a reversing entry. This credits Accounts Receivable and debits Service Revenue, simplifying the accounting process when you eventually send the real invoice and record the payment.

6. Interest Accrual (The 'Time is Money' Entry)

Interest accrual is an adjusting entry that recognizes interest expense incurred or interest income earned that has not yet been paid or received by the end of an accounting period. For businesses with loans, lines of credit, or interest-bearing savings accounts, this entry is crucial. It upholds the matching principle by recording interest in the period it accumulates, rather than waiting for a cash transaction, providing a truer financial picture.

This is one of the most common examples of adjusting entries for any company utilizing debt financing or holding cash reserves. Ignoring accrued interest on a loan can understate your expenses and liabilities, artificially inflating your net income. Conversely, failing to accrue interest earned on savings understates your income and assets.

Example: Business Loan Interest

Suppose your business took out a $50,000 loan on March 1st with a 6% annual interest rate. The first payment, which includes interest, isn't due until April 15th. As of March 31st, you have incurred one full month of interest expense even though you haven't paid it.

• Without an Adjusting Entry: Your March income statement would show no interest expense, and your balance sheet would under-report your total liabilities.
• With an Adjusting Entry: You recognize the interest that has built up during March, matching the expense to the correct period.

The calculation for one month's interest is: ($50,000 Principal × 6% Annual Rate) / 12 Months = $250.

The adjusting journal entry on March 31st would be:

Account	Debit	Credit
Interest Expense	$250
Interest Payable		$250

This entry correctly adds $250 to your expenses for March and increases liabilities on your balance sheet to reflect the amount owed to the lender.

Strategic Takeaways & Best Practices

To accurately manage interest accruals, implement these financial controls:

• Maintain a Debt Schedule: Keep a detailed schedule of all loans, including principal balances, interest rates, and payment terms. This is your single source of truth for accrual calculations.
• Use the Right Formula: Calculate monthly interest accrual using the simple interest formula (Principal × Rate × Time). For most business loans, "Time" will be 1/12 for a monthly accrual.
• Reconcile with Statements: When you receive the lender statement, verify your accrued amount against the actual interest charged. This helps catch discrepancies early and ensures your records are precise.

7. Inventory Adjustment (Cost of Goods Sold)

While many service-based businesses don't carry extensive product stock, they often maintain a significant amount of supplies or materials that are consumed during operations. An inventory adjustment entry is used to recognize the cost of these consumed supplies as an expense during the period. This is another one of the crucial examples of adjusting entries that aligns expenses with the revenue they helped generate.

Instead of expensing supplies immediately upon purchase, they are first recorded as an asset (e.g., Supplies Inventory). At the end of the accounting period, a physical count or usage log determines how much was used. This used portion is then expensed, moving its cost from the balance sheet to the income statement. This process is a key component of the full accounting cycle, ensuring that assets are not overstated and expenses are not understated. For more on this, you can explore the steps involved in the full-cycle accounting process.

Example: Cleaning Service Supplies

Imagine a commercial cleaning company starts April with $1,500 worth of cleaning supplies on hand. During April, they purchase an additional $2,000 in supplies. At the end of the month, on April 30th, a physical count reveals that only $800 worth of supplies remains.

• Without an Adjusting Entry: The company's balance sheet would incorrectly show a Supplies asset of $3,500 ($1,500 beginning + $2,000 purchases), and the income statement would show no expense for the supplies used, artificially inflating profit.
• With an Adjusting Entry: The company calculates the cost of supplies used: $1,500 + $2,000 – $800 = $2,700. This amount is recorded as an expense for April.

The adjusting journal entry on April 30th would be:

Account	Debit	Credit
Cleaning Supplies Expense	$2,700
Supplies Inventory		$2,700

This entry correctly reduces the inventory asset on the balance sheet to its actual value ($800) and increases expenses on the P&L, providing a true picture of April's profitability.

Strategic Takeaways & Best Practices

To effectively manage and record inventory adjustments, implement the following:

• Conduct Regular Physical Counts: Make monthly or quarterly physical counts of key supplies a non-negotiable part of your closing process. Document the counts with dates and signatures.
• Use the Usage Formula: Consistently apply the formula: Beginning Inventory + Purchases – Ending Inventory = Supplies Expense. This provides a clear, auditable trail for the adjustment.
• Establish Reorder Points: Set minimum quantity levels for critical supplies to trigger a new purchase. This prevents operational delays caused by stockouts and avoids costly emergency orders.
• Review Usage Trends: Analyze your supply expense quarterly to identify patterns, potential waste, or opportunities to negotiate better pricing with vendors based on volume.

8. Income Tax Accrual and Estimated Tax Payments

For businesses that generate taxable income, accruing for income tax expense is a critical adjusting entry. This process recognizes the estimated federal, state, and local income taxes owed based on the earnings generated within a specific accounting period. The goal is to match the tax expense to the revenue that created the tax liability, providing a more accurate picture of a company's true "after-tax" profitability.

This is especially important for corporations and other entities that pay income taxes directly. Ignoring this accrual until the tax bill is due can drastically overstate net income throughout the year, leading to poor financial decisions. By recording an estimate of the tax liability each period, the financial statements present a more realistic view of the company's retained earnings. This is a key part of the adjusting entries process for profitable businesses.

Example: Quarterly Tax Estimation for an S-Corp

Imagine an S-Corporation projects it will have a net income of $200,000 for the year. After consulting with their CPA, they estimate their effective tax rate will be 25%. This results in a total estimated annual tax liability of $50,000, or $12,500 per quarter. At the end of the first quarter (March 31st), the company needs to account for this obligation.

• Without an Adjusting Entry: The March income statement would show a higher net income, and the balance sheet would not reflect the $12,500 owed to tax authorities, understating liabilities.
• With an Adjusting Entry: The company properly records the tax expense for the quarter, matching it to the income earned during that period.

The adjusting journal entry on March 31st would be:

Account	Debit	Credit
Income Tax Expense	$12,500
Income Taxes Payable		$12,500

This entry increases expenses, reducing net income on the P&L statement, and establishes a current liability on the balance sheet for the amount owed.

Strategic Takeaways & Best Practices

To effectively manage income tax accruals and avoid underpayment penalties, consider these best practices:

• Consult a Tax Professional: Work closely with your CPA to determine an accurate estimated effective tax rate based on your specific situation, including deductions and credits.
• Track Profitability Closely: Review your P&L statement monthly or quarterly. If profits are higher or lower than projected, adjust your tax accrual accordingly to avoid a large surprise at year-end.
• Set Aside Cash: Open a separate business savings account specifically for tax payments. Transfer the accrued amount into this account each period so the funds are available when quarterly estimated payments are due.

Comparison of 8 Adjusting Entries

Title	🔄 Implementation complexity	⚡ Resource requirements	📊 Expected outcomes	💡 Ideal use cases	⭐ Key advantages
Accrued Expenses (Accruals)	Moderate — requires estimation, month‑end adjustments	Vendor/payment schedules, accounting time, documentation ⚡	Accurate period expense recognition; liability on balance sheet 📊	Service providers with deferred billing or payroll timing 💡	⭐⭐⭐ GAAP compliance; improves cash‑timing visibility
Prepaid Expenses (Deferred Expenses)	Low–Moderate — amortization schedule maintenance 🔄	Payment records, prepaid schedule, simple automation ⚡	Systematic expense allocation over benefit periods 📊	Annual insurance, SaaS, rent paid in advance 💡	⭐⭐ Prevents expense spikes; clearer balance sheet
Depreciation Expense	Moderate–High — asset tracking and method selection 🔄	Fixed asset register, useful‑life estimates, CPA input ⚡	Spreads asset cost; non‑cash expense recognition; tax basis 📊	Businesses with equipment, vehicles, computers 💡	⭐⭐⭐ Tax deferral/deductions; accurate long‑term earnings
Unearned Revenue (Deferred Revenue)	Moderate–High — contract & delivery tracking 🔄	Contract schedules, billing system, customer tracking ⚡	Correct revenue timing; liability recognition until earned 📊	Retainers, subscriptions, advance payments for services 💡	⭐⭐⭐ Prevents premature revenue recognition; aids forecasting
Accrued Revenue (Accounts Receivable)	Moderate — estimating unbilled work and reversals 🔄	Time/project tracking, invoicing process, documentation ⚡	Revenue matched to delivery; AR asset recorded 📊	Work‑completed‑not‑invoiced service engagements 💡	⭐⭐ Improves revenue accuracy; enhances AR visibility
Interest Accrual	Low–Moderate — periodic calculations based on terms 🔄	Loan/interest schedules, rate data, reconciliation ⚡	True financing cost recognition; liability or income recorded 📊	Businesses with loans, LOCs, or interest‑bearing accounts 💡	⭐⭐ Accurate debt cost reporting; aids cash planning
Inventory Adjustment (COGS)	Moderate–High — physical counts or perpetual system 🔄	Inventory counts, tracking system, documentation ⚡	Correct COGS recognition; reduces asset overstatement 📊	Service firms using supplies or materials (e.g., cleaning, HVAC) 💡	⭐⭐ Improves cost control; supports budgeting
Income Tax Accrual & Estimated Payments	High — tax estimation, multi‑jurisdiction complexity 🔄	Projected P&L, tax expertise/CPA, reserve accounts ⚡	Reserved tax liability; smoother year‑end tax outcome 📊	Profitable service businesses planning quarterly estimates 💡	⭐⭐⭐ Reduces year‑end surprises; supports cash reserve planning

From Chaos to Clarity: Making Adjusting Entries Your Strategic Advantage

Mastering the mechanics of adjusting entries is the fundamental dividing line between basic bookkeeping and strategic financial management. As we've explored through detailed examples of adjusting entries, these are not merely procedural steps to be checked off a list. They are the essential mechanisms that ensure your financial statements speak the truth about your business's performance and position, adhering to the accrual basis of accounting.

By moving beyond a simple cash-in, cash-out perspective, you unlock a more nuanced and powerful understanding of your operations. The examples of accrued expenses, prepaid assets, and unearned revenue show precisely how you've earned and consumed resources within a specific period, regardless of when cash changed hands. This provides a true picture of profitability.

The Strategic Shift: From Reactive to Proactive

The real value of diligently applying these adjustments is the strategic clarity it provides. A clean, accrual-based set of books transforms financial reporting from a historical record into a forward-looking decision-making tool.

• Informed Decision-Making: When your income statement accurately reflects revenues earned and expenses incurred for a given month, you can confidently analyze profit margins, assess the profitability of a new service line, or determine the true cost of customer acquisition.
• Enhanced Financial Health: Properly recorded depreciation and bad debt allowances ensure your Balance Sheet isn't inflated with overvalued assets or uncollectible receivables. This gives you, your investors, and your lenders a realistic view of your company's net worth and stability.
• Operational Efficiency: A disciplined month-end close process, built around a checklist of standard adjusting entries, creates a predictable rhythm for your financial operations. It eliminates the end-of-quarter chaos and ensures timely, reliable data is always available.

Key Takeaway: Adjusting entries are the engine of accrual accounting. They align your financial data with the reality of your business operations, enabling you to manage by the numbers, not by your bank balance.

Putting It All Into Practice: Your Actionable Next Steps

Understanding the theory is the first step; consistent implementation is what drives results. The specific tactics and QuickBooks workflows detailed in each example are designed to be immediately applicable.

1. Create a Month-End Close Checklist: Start by listing the adjusting entries relevant to your business. Use the eight examples in this article as your foundation: accrued expenses, prepaid expenses, depreciation, unearned revenue, accrued revenue, interest, inventory, and income tax.
2. Standardize Your Journal Entries: For recurring adjustments like depreciation or the amortization of a prepaid insurance policy, create templates or recurring journal entries in your accounting software. This saves time and dramatically reduces the risk of error.
3. Review, Don't Just Record: The final step of the process isn't just posting the entry; it's reviewing the adjusted financial statements. Do the numbers make sense? Does the adjusted gross profit margin align with your expectations? This review is where you'll find the most valuable strategic insights.

Ultimately, the process of recording adjusting entries is about building a reliable foundation of financial intelligence. It’s the commitment to this discipline that empowers business owners, fractional CFOs, and operational leaders to navigate challenges, seize opportunities, and steer their organizations toward sustainable growth with confidence and clarity.

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Ready to transform your bookkeeping from a necessary chore into a strategic asset? The team at Steingard Financial specializes in providing expert bookkeeping, payroll, and advisory services that ensure your financial data is always accurate, timely, and insightful. Visit Steingard Financial to learn how we can manage the complexities of your accounting, including all necessary adjusting entries, so you can focus on growing your business.