To make adjusting entries, work through your accounts at the end of the period and record journal entries that move revenue and expenses into the period they actually belong to. Under accrual accounting, revenue is recognized when earned and expenses are recognized when incurred, no matter when cash moves. Every adjusting entry touches at least one balance sheet account and one income statement account, is dated the last day of the period, and never touches cash. Get those rules right and the rest is arithmetic.
Pull the Records You’ll Need
Start with the unadjusted trial balance. It shows every account balance before adjustments and tells you where to look. Then gather the documents that reveal what the trial balance is missing: bank statements for fees or interest the bank assessed, payroll records showing wages earned through the last day of the period, depreciation schedules, insurance policies with their coverage dates, loan agreements showing rates and payment dates, and receipts for supplies purchases.
Scan for trigger points. A balance in unearned revenue means a customer paid before you delivered. A prepaid insurance balance that hasn’t moved in months means policy time is passing without any expense hitting the books. A last payday that fell several days before period-end means wages have been earned but not paid. Each of these situations calls for an adjusting entry, and the supporting documents give you the dollar amounts.
The Five Types of Adjusting Entries
Two rules hold across all of them. Debits equal credits. Cash is never adjusted through an adjusting entry, because cash has either moved or it hasn’t and the bank statement already reflects that.
Accrued Expenses
Costs you’ve incurred but haven’t paid. The classic case is wages. If your company pays employees $10,000 every two weeks and the period ends mid-cycle, you owe $5,000 in wages that won’t be paid until next period. Debit Wages Expense $5,000, credit Wages Payable $5,000.
Interest on loans works the same way. On a $100,000 note payable at 6% annual interest, one month of interest is $500 (100,000 × 0.06 ÷ 12). Debit Interest Expense, credit Interest Payable. The bank hasn’t billed you, but the cost belongs to this period.
Accrued Revenues
The mirror image. You performed the work but haven’t invoiced yet. A consultant who bills $200 an hour and worked 15 hours before period-end earned $3,000 that isn’t in the books. Debit Accounts Receivable $3,000, credit Service Revenue $3,000. The invoice will go out next period; the revenue was earned now.
Deferred Expenses (Prepaid Items)
Payments you already made for something you haven’t fully used. If you paid $12,000 upfront for a twelve-month insurance policy, you consume $1,000 of coverage each month. Each month-end, debit Insurance Expense $1,000 and credit Prepaid Insurance $1,000. The prepaid balance shrinks as the expense shows up on the income statement.
Supplies work the same way. If you started the month with $800 in supplies and a physical count at month-end shows $300 left, you used $500. Debit Supplies Expense $500, credit Supplies $500.
Deferred Revenues (Unearned Revenue)
The customer paid you before you did the work. A law firm that receives a $5,000 retainer hasn’t earned that money until it performs services. Once the firm completes $2,000 of work in the period, it debits Unearned Revenue $2,000 and credits Service Revenue $2,000. The liability shrinks as the revenue is earned.
Depreciation
Depreciation spreads a long-lived asset’s cost across its useful life. Using straight-line, a $60,000 machine with a five-year life and no salvage value costs $12,000 a year, or $1,000 a month ($60,000 ÷ 60). Each month, debit Depreciation Expense $1,000 and credit Accumulated Depreciation $1,000. The credit goes to a contra-asset account rather than reducing the asset directly, so the original cost and the amount written off both stay visible.
Inventory Shrinkage
If you carry inventory, a physical count at period-end sometimes shows less stock than the records. The difference is shrinkage from theft, damage, or counting errors. Subtract the physical count from the book value. If records show $100,000 of inventory but the count totals $97,000, you have $3,000 in shrinkage. Debit Cost of Goods Sold $3,000, credit Inventory $3,000. Skipping this overstates assets and understates expenses.
Record the Entry Correctly
Date every adjusting entry the last day of the period, whether that’s March 31, June 30, December 31, or wherever your period closes. The whole point is to capture activity that belongs to the period being closed, so the date is non-negotiable.
Each entry needs at least one debit and one credit, and the totals have to match. That’s true for any journal entry, but adjusting entries are often prepared under deadline pressure, and a rushed unbalanced entry will cascade errors through the financial statements.
Write a short narrative under each entry explaining why it exists. “To accrue wages earned Dec. 27–31, not yet paid” tells anyone reviewing the books exactly what happened. If your accounting software has a flag or module for adjusting entries, use it. That keeps period-end corrections visually separate from routine daily transactions and cleans up the audit trail.
Check account numbers against the chart of accounts before saving. Posting an adjustment to the wrong account is one of the most common period-end mistakes and it’s easy to miss, because a misclassified entry still balances. The trial balance won’t tell you anything is wrong. The only way to catch it is to review each entry individually.
Post to the Ledger and Confirm the Adjusted Trial Balance
Once entries are saved, they need to post to the general ledger. Software does this automatically. In a manual system you transfer each debit and credit to the corresponding ledger page by hand. Either way, the individual account balances now reflect the adjustments.
Then run the adjusted trial balance. Its job is simple: confirm total debits still equal total credits after all adjustments. If they don’t, trace the discrepancy back through the ledger postings to the original journal entries. A balanced adjusted trial balance doesn’t guarantee every entry is correct, but an unbalanced one guarantees something is wrong. Financial statements are built directly off the adjusted trial balance: revenue and expense accounts flow into the income statement, and asset, liability, and equity accounts form the balance sheet.
Reverse Accruals on Day One of the Next Period
Certain adjusting entries should be reversed on the first day of the next period. This step is technically optional but essential in practice for accrued expenses and accrued revenues. Skip it and you’ll record the same expense or revenue twice.
Here’s how double-counting happens. You accrued $2,000 in wages at the end of August because employees worked the last few days of the month but weren’t paid until September. You debited Wages Expense and credited Wages Payable for $2,000. When the September paycheck goes out and you record the full payment, the August accrual is still sitting in the ledger. Without a reversal, September wages expense includes both the $2,000 already recognized in August and the full September payment.
The fix is one entry. On September 1, debit Wages Payable $2,000, credit Wages Expense $2,000. That zeros out the accrual. When the actual September paycheck is recorded normally, the expense lands cleanly in September with no overlap. Most accounting software can automate reversals if you flag the original entry, which is another reason to use the adjusting-entry flag.
Not every adjustment needs reversal. Depreciation doesn’t reverse, because it doesn’t create a timing conflict with a future cash transaction. The entries that benefit from reversal are the ones where a cash event next period would otherwise duplicate what you already accrued.
Mistakes to Check Before You Close
The most frequent error is forgetting to make an adjustment at all. Unbilled revenue, accrued utilities, and depreciation on newly purchased assets slip through most often because there’s no invoice or external reminder prompting them. A standardized checklist of recurring adjustments for each close eliminates most of these omissions.
Incorrect proration is the second pitfall. A six-month insurance policy purchased on the 15th doesn’t produce a first-month expense of one-sixth of the premium; it’s half that. Proration errors are small individually but accumulate across multiple prepaid items.
Posting to the wrong account is the hardest to catch, because the trial balance still balances. The only symptom is one account overstated and another understated by the same amount. Compare each adjusted balance to prior periods line by line. A balance that jumped or dropped with no obvious business reason deserves investigation.
Finally, failing to reverse accruals in the next period leads to the double-counting problem above. If your software doesn’t automate reversals, add a manual step to your opening-period procedures to reverse every accrual from the prior close.