Adjusting Journal Entries, Explained: What to Post Before You Close the Month

The money in your bank account is a fact. Your profit figure is a judgement — and adjusting journal entries are where that judgement gets made. Two companies can move identical money in identical months and publish very different profit, purely because one of them posted a handful of entries on the final day and the other didn't.

An adjusting journal entry is what you post at period end so that revenue and costs sit in the month the work happened rather than the month the money moved. It's the difference between accounting and watching a bank balance. Below: why they exist, all five patterns written out with real figures, and the small set of rules that stop you making the usual mess of them.

The Reason Adjustments Are Necessary

Two principles hold accrual accounting together. Income counts when it's earned, not when it's collected. Costs count when they're incurred, not when they're paid — and, wherever you can manage it, in the same month as the income they helped generate. That second principle is the matching principle, and it's why an income statement can describe performance rather than merely list banking activity.

Cash, unfortunately, ignores all of this. September's electricity turns up on an October bill. Insurance is bought a year at a time. A client pays for twelve months of support in one January transfer. A van bought this month keeps earning for five years. Ordinary day-to-day bookkeeping stamps each of those on the date the money shifted — which drops costs and income into months that had nothing to do with them.

Adjustments put them back. Dated the final day of the period and posted before you produce any statements, they redistribute the amounts to where they belong.

Every adjustment pairs one profit-and-loss account with one balance-sheet account — and leaves cash alone. An entry that moves cash isn't an adjustment; it's a transaction someone forgot to enter.

Five Patterns That Cover Nearly Everything

Two of them handle activity that ran ahead of the money (accruals). Two handle money that ran ahead of the activity (deferrals). The fifth handles an asset quietly being used up.

1. Costs you've incurred that nobody has invoiced yet

The lights were on all September. Your supplier reads the meter on 3 October and bills you on the 12th. Do nothing and September looks suspiciously cheap while October carries a double hit.

Suppose September's usage comes to $480. Dated 30 September:

September now shoulders its own power cost and the balance sheet admits the $480 debt. Once the genuine invoice appears in October you back the accrual out (more on reversals shortly) and enter the supplier bill as normal, so nothing gets counted twice. Wages earned but unpaid at month end, loan interest accruing daily, and unpaid sales commission all follow this identical shape.

2. Work you've delivered that you haven't billed out

Same idea, other direction. A consultancy records 22 hours at $150 on a client engagement during September and raises the invoice on 5 October. Those $3,300 were earned in September, so September's income statement is where they belong.

Owners drop this one more than any other, and it's the reason a growing services firm can look becalmed on paper. Bill in arrears without accruing and a month of genuine effort simply doesn't appear until the invoice does — meaning the revenue you read each month is really the previous month's.

3. Things you paid for in advance

You settle $7,200 on 1 January for a year of liability cover. That isn't a January cost; it's an asset you'll use up a month at a time. The payment itself:

Then, each month for twelve months, the adjustment that turns a slice of that asset into an actual cost:

Come 31 December the prepaid balance has run to nil and every month carried $600 of cover. Annual software licences, rent paid up front, legal retainers and yearly memberships behave exactly the same. A quick year-end test: a prepaid balance that hasn't shifted in months almost always means a schedule someone quietly stopped posting.

4. Money taken before you'd delivered anything

A customer buys a $12,000 annual support plan on 1 March and pays the lot up front. None of it is income on 1 March — it's a commitment to perform, which makes it a liability. Collecting it:

And every month, as you actually do the work, one twelfth becomes real income:

Deposits taken on jobs still in progress work the same way — we follow one all the way through in recording customer deposits. The warning sign here is a deferred balance that only ever grows: either the monthly releases aren't happening, or somebody booked the sale twice.

5. The asset you're steadily wearing out

A $30,000 delivery van, expected to be worth $5,000 after five years. Straight-line, that's $25,000 across 60 months — $416.67 every month:

The van's original cost account is never touched. Accumulated Depreciation sits underneath it as a contra-asset, so your balance sheet reports both what you paid and how much life you've consumed. Writing down intangibles — a bought customer list, capitalised development — uses the same structure. The other three methods, with full schedules, are in our depreciation walkthrough.

Three Others You'll Meet Eventually

Past the core five, three more turn up often enough to know:

• Provision for bad debts. When an invoice is plainly never getting paid, debit Bad Debt Expense and credit Allowance for Doubtful Accounts so receivables reflect what you'll genuinely collect.
• Stock adjustment. After a physical count, an entry drags recorded inventory back to what's really on the shelf, with the gap landing in cost of goods sold or a shrinkage account.
• Estimated tax. Tax accrued on the period's result — debit Income Tax Expense, credit Income Taxes Payable.

Which adjusting journal entries have to be reversed?

Two of the five, as a rule. Accrued costs and accrued income normally get reversed on the first day of the following period, so the genuine bill or invoice can be entered in the ordinary way with no double-count. Prepayment releases, deferred income releases and depreciation are never reversed — each month's entry is simply the next instalment of a schedule that's still running.

Aren't closing entries the same thing?

No — they're consecutive steps. Adjustments happen at the end of every period, ahead of the statements, and they alter what those statements say. Closing entries happen once a year, after everything is adjusted, clearing income and expense accounts to zero and rolling the annual result into Retained Earnings. That second step is covered in year-end closing entries.

Where do adjustments sit in the monthly routine?

After the bank accounts are reconciled and you've reviewed what's owed to and by you, but before any statement gets generated. You can't adjust a month you haven't finished entering, and there's no sense reading statements you haven't adjusted. It's the fifth of eight steps in our month-end close routine.

Where People Actually Go Wrong

1. Running them through the bank account. The quickest way to spot a broken adjustment. Cash is recorded when it moves; adjustments only redistribute income and cost.
2. Dating them a day late. An entry stamped the 1st instead of the 30th lands the amount in precisely the month you were trying to keep it out of.
3. Accruing, then never reversing. The accrual sits there, the genuine bill arrives, and the cost counts twice — usually spotted when a liability account swells and never drains.
4. Starting a schedule and dropping it. Prepayments and deferred income need posting every month, not only the month they were set up.
5. Leaving the description blank. In six months nobody can say what "JE-0114" was. Write what it is, which period it covers and how you arrived at the figure.

How Kantivo Handles Period-End Adjustments

Everything above is an ordinary double-entry journal, and Kantivo treats it as exactly that: choose the accounts, key the debits and credits, date it to the period end, and leave a description that will still make sense a year from now. The ledger is real double-entry bookkeeping, so nothing posts until it balances — and the instant it does, income statement, balance sheet and trial balance all move as one.

Three features take the tedium out. Journals can be memorised and set to recur, so a monthly prepayment release or depreciation charge posts on schedule rather than depending on your memory. Accruals can be reversed automatically into the next period, which eliminates the single most common double-count. And reports run on either a cash or accrual basis with no re-keying at all, so the view you manage by and the GAAP-compliant view your accountant asks for come from one set of books — held on your own machine.

The Takeaway

Adjusting journal entries aren't an accountant's ceremony — they're the machinery that gives a monthly income statement meaning. Five patterns handle almost all of it: accrue what you consumed, accrue what you delivered, release what you prepaid, earn what you collected early, and depreciate what you're using up. Each one links a single profit-and-loss account to a single balance-sheet account, and not one of them belongs anywhere near your bank account.

Begin with the two that hurt most when they're missing — unbilled work and unrecorded costs — then layer the schedules on top. One quarter in, you'll have monthly figures worth comparing to each other. That was always the point.

Frequently Asked Questions

What is an adjusting journal entry?

It is an entry dated the final day of a period whose only job is to shift income or cost into the period that genuinely earned or incurred it. Because cash and activity rarely happen in the same month, adjustments are what keep an accrual-basis income statement honest.

Which adjusting entries do most small businesses need?

Five recur constantly: costs incurred but not yet invoiced to you, work performed but not yet billed out, amounts paid ahead and consumed monthly, money taken before delivery, and the monthly slice of a fixed asset's cost. Bad debt, stock counts and estimated tax show up less often.

Can an adjusting entry include the bank account?

It should not. Cash gets recorded the day it moves; an adjustment simply reassigns income and cost between periods. An adjustment that credits or debits a bank account is really a missed transaction or a correction wearing the wrong label.

How do adjusting entries differ from closing entries?

Adjustments run at the end of every period and change what the statements report. Closing entries run once a year, after all adjustments, and clear income and expense balances to zero by transferring the annual result into Retained Earnings.

Are adjustments needed if I keep cash-basis books?

Largely not. Recording only when money changes hands removes the need for accruals, prepayment schedules and deferred income. Depreciation is the usual holdout, because equipment is still capitalized and written down across the years you use it.

Which adjustments get reversed the following period?

The two accrual types. Reversing an accrued cost or accrued income on day one of the next period lets you enter the real bill or invoice the ordinary way with no risk of counting it twice. Prepayment releases, deferred income releases and depreciation stay put.

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