Posting adjusting entries to the general ledger is a repeatable end-of-period sequence: identify what the books are missing by comparing source documents to the unadjusted trial balance, calculate each amount, write the journal entry with a clear narrative, post the debits and credits to the affected ledger accounts, and prove the result with an adjusted trial balance. The purpose is to bring your ledger in line with the accrual method, which reports income when earned and expenses when incurred rather than when cash changes hands.1Internal Revenue Service. Publication 538, Accounting Periods and Methods Do it carefully. An overlooked accrual or a misposted deferral distorts profit and can flow straight through to your tax return.
Know Which Adjustment You’re Making
Before you write anything down, name the pattern. Every adjusting entry is one of four types, and once you can label it, the debit-and-credit logic follows on its own.
- Accrued expenses. You’ve received a benefit but haven’t paid. Wages earned in the last days of the month, interest building on a loan. Record the expense and a matching liability.
- Accrued revenues. You’ve delivered the work but haven’t billed. Record revenue and a matching receivable.
- Deferred expenses (prepaids). You paid up front for something you’ll use over time, like insurance or rent. Each period, move a slice from the asset account into expense.
- Deferred revenues. A customer paid in advance for work you haven’t finished. Each period, move the earned portion from a liability account into revenue.
Depreciation, bad debt reserves, and inventory shrinkage are variations on these four. Identify the pattern first, and the entry stops feeling like a puzzle.
Pull the Documents That Show What’s Missing
Start with the unadjusted trial balance. That report lists every account’s ending balance before period-end changes, and it’s your baseline. Compare it against your source documents:
- Bank statements, for interest income, service charges, and automatic debits not yet recorded.
- Insurance policies, to figure how much of a prepaid premium has been used since the effective date.
- Loan amortization schedules, for interest that has accumulated since the last payment.
- Payroll records, to flag wages earned in the final days of the period that won’t be paid until the next cycle.
- Vendor invoices dated near period-end, for goods or services received but not yet booked as liabilities.
- Physical inventory counts, against what the ledger says should be on hand.
- Customer contracts, for work done but not billed and for advance payments where delivery is incomplete.
This comparison is where most of the real work sits. Once you know what’s missing, the entries themselves are mechanical.
One judgment call runs through the whole exercise: materiality. Not every small discrepancy is worth a formal entry. A common rule of thumb treats misstatements below 5% of net income as presumptively immaterial, though the SEC warns against relying on any single percentage.2SEC.gov. SEC Staff Accounting Bulletin No. 99 – Materiality Qualitative factors can make a tiny misstatement material anyway — for instance, one that flips a reported profit into a loss. Use the percentage to screen, not to excuse.
Calculate Each Amount and Show Your Work
Document every calculation in a workpaper detailed enough that someone reviewing the file six months later can trace the number back to a source. The common patterns:
Prepaid Expenses
Divide the total prepaid amount by the number of periods it covers. A $12,000 annual insurance policy produces a $1,000 monthly adjustment. Debit Insurance Expense, credit Prepaid Insurance. Same logic for prepaid rent and prepaid subscriptions.
Accrued Interest
Multiply outstanding principal by the annual rate, then divide by twelve. A $50,000 loan at 6% is $250 per month ($50,000 × 0.06 ÷ 12). Debit Interest Expense, credit Interest Payable. Where the period doesn’t align with the payment schedule, prorate by days elapsed since the last payment.
Depreciation
Under straight-line, subtract salvage value from cost and divide by useful life. Equipment costing $60,000 with a five-year life and no salvage produces a $1,000 monthly entry ($60,000 ÷ 60). Debit Depreciation Expense, credit Accumulated Depreciation. Double-declining balance front-loads more expense into the early years, so the monthly figure isn’t constant; check the schedule each period.
Accrued Wages
When a pay period straddles two reporting periods, calculate the daily rate and multiply by the days falling in the current period. Someone earning $150 a day who works three days before period-end generates a $450 accrual. Debit Wages Expense, credit Wages Payable. This is one of the most commonly forgotten adjustments, and one of the best candidates for a reversing entry.
Bad Debt Estimates
Under the allowance method, you estimate uncollectibles before knowing which specific accounts will default. The percentage-of-sales approach multiplies credit sales by your historical bad debt rate: on $100,000 of credit sales at a 4% rate, the adjustment is $4,000. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts. Businesses with fewer customers sometimes use an accounts receivable aging report instead, weighting older invoices more heavily.
Inventory Shrinkage
Compare the physical count to the ledger. If the books show $100,000 but the count reveals $97,000, record $3,000 as a debit to Cost of Goods Sold and a credit to Inventory.
Unearned Revenue
When a customer prepays for work delivered over time, initially record the payment as a liability. Each period, move the earned share into revenue. A $6,000 retainer covering six months is a $1,000 monthly entry: debit Unearned Revenue, credit Service Revenue.
Write the Journal Entry
With calculations in hand, the recording begins in the general journal. Each entry needs four elements: the date, the accounts affected, the amounts in the correct debit and credit columns, and a brief narrative explaining the reason. The narrative matters more than people think. “Adjusting entry” tells a later reviewer nothing. “Accrued 3 days wages, Dec 29–31” tells them everything they need.
Post to the Ledger
In accounting software, you’ll open a journal entry screen, select the general ledger account codes, enter the amounts, and save. Most systems post to the ledger automatically once the entry is approved, updating each account’s running balance in real time. Review the posted entries anyway. Automated posting eliminates transcription errors but doesn’t catch a wrong account code or a miskeyed amount.
Manual Posting
If you’re keeping a manual ledger, posting is a separate step from journalizing. After recording the entry in the general journal, find the ledger page for each affected account. Enter the date and amount in the appropriate debit or credit column, then update the running balance. Write a cross-reference next to the ledger entry, typically the journal page number, so anyone reviewing the books can trace the posting back to its source. A transposed digit or a debit posted as a credit will surface as an imbalance in the trial balance, so accuracy at this step saves time later.
Audit Trail Essentials
Whether the system is manual or digital, every adjusting entry should be traceable. The trail captures who prepared the entry, when it was recorded, what accounts and amounts were affected, and what supporting documentation exists. Digital systems log timestamps, user IDs, and action descriptions automatically. Manual systems rely on workpapers, initials, and cross-references. The goal is straightforward: if a reviewer picks any entry at random, they should be able to follow it from the ledger back to the journal and from the journal back to the source document within a few minutes.
Prove the Posting With an Adjusted Trial Balance
After every entry is posted, generate an adjusted trial balance. Total debits and total credits must match. When they don’t, look for a one-sided entry or a transposition. An imbalance divisible by 9 often points to a transposed digit. An imbalance equal to an exact adjustment amount usually means one side of that entry didn’t post.
Balanced columns confirm mathematical accuracy, not that every entry hit the right account. You can overstate one expense and understate another by the same amount and still get equal totals. Review the account balances line by line against your workpapers before treating the period as closed. Once the adjusted trial balance holds up, those balances flow directly into the income statement, balance sheet, and other reports.
Reverse Certain Accruals at the Start of the Next Period
Reversing entries are optional but save real time on some accruals. On the first day of the new period, you record the mirror image of the accrual you just made. That zeroes it out, so when the actual cash transaction hits, the system can record it normally without creating a duplicate expense.
Take accrued wages. If you booked a $1,200 accrual on October 31 (debit Wages Expense, credit Wages Payable), you’d post a reversing entry on November 1: debit Wages Payable, credit Wages Expense for the same $1,200. When payroll runs on November 10, the system records the payment the usual way, reducing Wages Payable and cash, without dropping $1,200 of October wages into November.
Reversing entries fit accrued expenses and accrued revenues, the adjustments that create temporary receivables and payables you expect to settle early in the next period. They aren’t used for depreciation, bad debt estimates, or prepaid allocations, because those aren’t unwound by a single cash transaction. You can skip reversing entries and still get the accounting right, but you’ll then have to manually split cash transactions between periods when they straddle a boundary. For high-volume payroll or interest accruals, that manual splitting gets old fast.
Correcting an Entry After Statements Are Issued
If a mistake surfaces after the financials are finalized and the error is material, the correction is handled as a prior period adjustment. Rather than running the fix through current-period income, you restate the beginning balance of retained earnings for the earliest period affected. Comparative statements showing prior years get corrected directly, and the nature and impact of the error must be disclosed.3Federal Accounting Standards Advisory Board. Reporting Corrections of Errors and Changes in Accounting Principles, Amendment of SFFAS 7 Immaterial errors can generally be fixed through a normal current-period entry without restating anything.
Controls That Keep Postings Honest
Adjusting entries carry an inherent risk. They’re often prepared by one person, based on estimates, at the busiest point in the cycle. A few controls make a real difference.
Separation of duties is the most important. Whoever prepares an entry shouldn’t be the same person approving it or reconciling the account afterward. Two sets of eyes on each entry, at minimum. In a small business where full separation isn’t possible, a monthly review by the owner or an outside accountant is a workable substitute.
Keep a standardized checklist of recurring adjustments: depreciation, prepaids, accrued wages, bad debt, and the rest. Working from that list each period prevents the most common error, which is simply forgetting an entry. When an adjustment departs from the template, flag it for extra review and document the reasoning in the workpapers. Auditors give non-routine adjustments extra attention, and the preparer should do the same.