What is an adjusting entry?

Adjusting entries are changes to journal entries you’ve already recorded. Specifically, they
make sure that the numbers you have recorded match up to the correct accounting
periods. Journal track how money moves—how it enters your business, leaves it, and
moves between different accounts.
Here’s an example of an adjusting entry: In August, you bill a customer $5,000 for services
you performed. They pay you in September.
In August, you record that money in accounts receivable—as income you’re expecting to
receive. Then, in September, you record the money as cash deposited in your bank
account.
To make an adjusting entry, you don’t literally go back and change a journal entry—there’s
no eraser or delete key involved. Instead, you make a new entry amending the old one.
For example, going back to the example above, say your customer called after getting the
bill and asked for a 5% discount. If you granted the discount, you could post an adjusting
journal entry to reduce accounts receivable and revenue by $250 (5% of $5,000).
Making adjusting entries is a way to stick to the matching principle—a principle in
accounting that says expenses should be recorded in the same accounting period as
revenue related to that expense.
In the accounting cycle, adjusting entries are made prior to preparing a trial balance and
generating financial statements.
Why make adjusting entries?

When you make an adjusting entry, you’re making sure the activities
of your business are recorded accurately in time. If you don’t make
adjusting entries, your books will show you paying for expenses
before they’re actually incurred, or collecting unearned revenue
before you can actually use the money.
So, your income and expenses won’t match up, and you won’t be
able to accurately track revenue. Your financial statements will be
inaccurate—which is bad news, since you need financial statements
to make informed business decisions and accurately file taxes.
One more thing: Adjusting journal entries are essential for 
depreciating assets. Which is important for reporting 
tax deductions and balancing your books.
Who needs to make adjusting entries?
If you do your own accounting, and you use the 
accrual system of accounting, you’ll need to make your
own adjusting entries.
If you do your own accounting and you use the 
cash basis system, you likely won’t need to make
adjusting entries.
No matter what type of accounting you use, if you
have a bookkeeper, they’ll handle any and all adjusting
entries for you.
The five types of adjusting entries
If making adjusting entries is beginning to sound intimidating, don’t worry—there are
only five types of adjusting entries, and the differences between them are clear cut. Here
are descriptions of each type, plus example scenarios and how to make the entries.
1. Accrued revenues
When you generate revenue in one accounting period, but don’t recognize it until a later
period, you need to make an accrued revenue adjustment.
Example scenario
Your business makes custom tote bags. In February, you make $1,200 worth for a client,
then invoice them. The client pays the invoice on March 7.
You incurred expenses making the bags—cost of materials and labor, workshop rent,
utilities—in February. To accurately reflect your income for the month, you need to show
the revenue you generated. (Remember: Revenue minus expenses equals income.)
First, you make an adjusting entry, moving the revenue from a “holding account” (accrued
receivables) to a revenue account (revenue.) Then, on March 7, when you get paid and
deposit the money in the bank, you move the money from revenue to cash.
. Accrued expenses

Once you’ve wrapped your head around accrued revenue, accrued

expense adjustments are fairly straightforward. They account for
expenses you generated in one period, but paid for later.
Example scenario
Suppose in February you hire a contract worker to help you out
with your tote bags. You agree in advance to pay them $400 for a
weekend’s work. However, they don’t invoice you until early
March.
Example adjusting entry
In February, you record the money you’ll need to pay the
contractor as an accrued expense, debiting your labor expenses
account
Continue
3. Deferred revenues
If you’re paid in advance by a client, it’s deferred revenue. Even
though you’re paid now, you need to make sure the revenue is
recorded in the month you perform the service and actually incur the
prepaid expenses.
Example scenario
Over the years, you’ve become well-respected in the tote bag
community. You’re invited to speak at the annual Tote Symposium, in
Lodi, California.
The conference showrunners will pay you $2,000 to deliver a talk on
the changing face of the tote bag industry. They pay you in January,
after you confirm you’ll be attending. You’ll speak at the conference in
March
4. Prepaid expenses
Prepaid Expenses work a lot like deferred revenue.
Except, in this case, you’re paying for something up
front—then recording the expense for the period it
applies to.
Example scenario
You rent a new space for your manufacturing business,
and decide to pre-pay a year’s worth of rent in
December.
5. Depreciation expenses

When you depreciate an asset, you make a single payment for it, but
disperse the expense over multiple accounting periods. This is usually
done with large purchases, like equipment, vehicles, or buildings.
At the end of an accounting period during which an asset is
depreciated, the total accumulated depreciation amount changes on
your balance sheet. And each time you pay depreciation, it shows up
as an expense on your income statement.
The way you record depreciation on the books depends heavily on
which depreciation method you use. It’s a pretty complex operation
involving large sums. Considering the amount of cash and tax liability
on the line, it’s smart to consult with your accountant before
recording any depreciation on the books. To get started, though,
check out our guide to small business depreciation.
Trading A/c Format
Income statement
Balance sheet Format