Accounting technology / Glossary / Adjusting entries

What are adjusting entries?

Definition

Adjusting entries are journal entries made at the end of an accounting period so that income and expenses fall in the period they belong to. They record accruals for costs and income not yet invoiced, release prepayments and deferred revenue, book depreciation and provisions, and correct errors found during the close, before the financial statements are prepared.

Also calledadjusting journal entriesAJEsperiod-end adjustments

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Main types: Accruals, deferrals, estimates, corrections
When: Period-end, before reporting
Category: Financial close

Types of adjusting entries

There are four main types. Accruals record expenses incurred or revenue earned but not yet invoiced, such as unbilled consultancy or utilities used. Deferrals move amounts already invoiced to the right period: prepaid expenses released month by month, and deferred revenue recognised as it is earned. Estimates record depreciation, amortisation, bad debt provisions and other provisions. Corrections fix misposted or missing entries found during reconciliation. Most adjusting entries reverse or repeat each month, so ledgers and close tools let teams set them up as recurring or auto-reversing journals with supporting schedules. In an audit, AJE also means an adjustment proposed by the auditor and booked by the client. NetSuite and Sage Intacct schedule recurring journals; BlackLine, FloQast and Numeric manage the support and approvals.

Common questions

Why are adjusting entries needed?+

Because under the accrual basis, income and expenses belong to the period in which they are earned or incurred, not when cash moves or invoices arrive. Adjusting entries move amounts into the right period.

What is a reversing entry?+

An adjusting entry that is automatically reversed on the first day of the next period. It is used for accruals, so that when the real invoice is posted the expense is not counted twice.

Who approves adjusting entries?+

Usually a reviewer other than the preparer, with supporting calculations attached. Manual journals are a common route for errors and fraud, so auditors test them and companies set approval limits.