Adjusting Entries in Journal

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What are Adjusting Entries in Journal?

Adjusting Entries in Journal is the journal entry done by the company at the end of any accounting period based on the accrual concept of accounting, as companies are required to adjust the balances of their different ledger accounts at the accounting period end to meet the requirement of the standards set by the various authorities.

Adjusting entries (also known as accounting adjustments) are journal entries generally made at the end of a particular accounting period/reporting period to record the transactions in that accounting period but have not been recognized or recorded.

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Taking an adjusting entries exampleAdjusting Entries ExampleAdjusting entries (AJE) are entries made in a business firm's accounting journals to adapt or update the revenues and expenses accounts in accordance with the accrual principle and the matching concept of accounting, and examples are Prepaid Expenses and Accrued but Unpaid more of a company named ABC Corporation, which availed of long-term debt funding to implement its expansion plan. The financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for more period for the Company is January 2018 to December 2018 (January to December cycle).

Classification of Accounting Adjustments

Most of the adjusting journal entries made for accounting adjustments can be broadly classified under two major heads, i.e., deferral and accrualsDeferral And AccrualsAccrual is the process of recording revenue or expenses that have not yet been settled. Deferring means postponing the realization of revenue or expenditure until a later more.  Deferrals include those transactions wherein a company pays or receives cash before consumption (either by a company or its clients). The accounting adjustments for prepaid expensesAccounting Adjustments For Prepaid ExpensesPrepaid expenses are paid in advance and hence are treated as an asset to the company. The most common prepaid expenses are rent and insurance. These are future expenses which are taken care of in advance, providing future economic more and unearned revenues come under deferrals. Accruals include those transactions wherein a company pays or receives cash after the consumption (either by a company or its clients). The adjusting journal entries for accrued expenses and accrued revenuesAccrued RevenuesAccrued revenues are the company's revenue in the normal course of business after selling the goods or providing services to a third party. However, the payment has not been received. Instead, it is shown as an asset in the balance sheet of the more come under accruals.

#1 – Accrued Revenue

Accrued revenue is a transaction wherein a company renders its goods and services to customers but receives the payment with a certain time delay. Suppose a company makes a sale for USD 100 million in an accounting period but receives only 80% of the payment for the sales made in the same accounting year. In this scenario, the accounting adjustments are made as a credit in the revenue account by USD 100 million and a debit entry of USD 20 million (100*20%) to accounts receivable in a balance sheetAccounts Receivable In A Balance SheetAccounts receivables is the money owed to a business by clients for which the business has given services or delivered a product but has not yet collected payment. They are categorized as current assets on the balance sheet as the payments expected within a year. read more.

#2 – Unearned Revenue

When a Company receives the payment in advance for its goods or services to be rendered in the future, such amount the company refers to unearned revenueCompany Refers To Unearned RevenueUnearned revenue is the advance payment received by the firm for goods or services that have yet to be delivered. In other words, it comprises the amount received for the goods delivery that will take place at a future more. Construction companies are a classic example of such transactions wherein they generally receive an advance from the client to start the work. They receive advance payments even before they start the construction work. Suppose the company received the advance payment for the work in December 2018 and is planning to start the work in January 2019. The Company will adjust journal entries in December 2019 to credit the revenue accountRevenue AccountRevenue accounts are those that report the business's income and thus have credit balances. Revenue from sales, revenue from rental income, revenue from interest income, are it's common more and debit the unearned revenue account.

#3 – Accrued Expenses

Accrued expenses are incurred and recorded by a company in an accounting period; expenses are not paid. These unpaid expenses are recorded in the payables account on the Company’s balance sheet. The most common example of payables is wage payables to employees, interest expense payable to banks, or payables to suppliers of raw materialsRaw MaterialsRaw materials refer to unfinished substances or unrefined natural resources used to manufacture finished more. The adjusting journal entries for payables are made by way of a debit entryDebit EntryDebit represents either an increase in a company’s expenses or a decline in its revenue. read more in the respective expense account in the income statement and by credit entry in the payables account in the company’s balance sheet.

#4 – Prepaid Expenses

Prepaid ExpensesPrepaid ExpensesPrepaid expenses refer to advance payments made by a firm whose benefits are acquired in the future. Payment for the goods is made in the current accounting period, but the delivery is received in the upcoming accounting more are classified as assets on a balance sheet. It arises when a company pays for consumables/services in advance, but it uses these consumables /services over time. One common example of prepaid expenseOne Common Example Of Prepaid ExpensePrepaid expense examples will provide an idea of the various payments made by the company in advance for those goods or services which will be procured in future. Some of these include prepaid rent, advance salary and prepaid more is the subscription fee paid by a company to a research company to avail of its services (research reports, industry research, outlook on various industries). In such transactions, the company pays the subscription fee upfront. However, a company will use the services of the research company over the accounting period. Once used/consumed, the prepaid expenses become an expense and are recorded in the income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user more. The unused portion of such prepaid expenses will remain in the prepaid expense account.


The basic premise before adjusting journal entries in the income statement and balance sheet is to make the reported financial statements in line with the concept of accrual-based accounting, i.e., conformance of the revenue recognition principleRevenue Recognition PrincipleThe revenue recognition principle falls under GAAP, which outlines the specific conditions under which the revenue is recognized and recorded. A business may receive payment early or later after delivering the goods and services to the customer, and still, revenue gets more and matching principle in the reported financials. The accounting adjustments help incorrectly allocate the income, expenses, assets, and liabilities, thus resulting in correct reported financials.

This has been a guide to what Adjusting Entries are in Journal. Here we discuss the classification of Accounting Adjustments (including deferrals and accruals) and practical examples. Here are the other articles in accounting that you may like –

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