Adjusting Journal Entry

What Is an Adjusting Journal Entry?

An adjusting journal entry is an entry in a company's general ledger that occurs at the
end of an accounting period to record any unrecognized income or expenses for the
period. When a transaction is started in one accounting period and ended in a later
period, an adjusting journal entry is required to properly account for the transaction.

Adjusting journal entries can also refer to financial reporting that corrects a mistake
made previously in the accounting period.

Understanding Adjusting Journal Entries

The purpose of adjusting entries is to convert cash transactions into the accrual
accounting method. Accrual accounting is based on the revenue recognition principle
that seeks to recognize revenue in the period in which it was earned, rather than the
period in which cash is received.

As an example, assume a construction company begins construction in one period but

does not invoice the customer until the work is complete in six months. The
construction company will need to do an adjusting journal entry at the end of each of
the months to recognize revenue for 1/6 of the amount that will be invoiced at the six-
month point.