Adjusting journal entries are accounting records made at the end of a period to update account balances so that financial statements reflect the true condition. They are essential because many transactions are not recorded in cash when they occur, such as accrued expenses or unearned revenue. Without adjusting entries, profit and financial position can be misstated.
According to the IFRS Foundation as of January 2026, 168 jurisdictions have adopted IFRS, making adjustment practices more standardized globally. In the U.S., GAAP provides similar guidance. Understanding examples of adjusting journal entries helps you prepare accurate and reliable financial statements. Investment also requires understanding financial statements.
Key Points
- Core definition: Adjusting entries update accounts to follow accrual and matching principles.
- Common types: Prepaid expenses, unearned revenue, depreciation, accruals, and bad debt.
- Timing: Made at the end of each accounting period before financial statements are prepared.
- Impact of errors: Missing adjustments can make profit too high or too low.
- Investment link: Accurate financial statements help fundamental analysis of stocks and crypto.
Why adjusting entries are mandatory
Adjusting entries ensure revenues and expenses are recognized in the correct period. Without them, financial statements do not follow accrual accounting. For example, a one-year prepaid rent must be allocated monthly.
• Accrual principle: Revenue is recognized when earned, not when cash is received.
• Matching principle: Expenses are recognized with the revenue they help generate.
• Standard compliance: GAAP and IFRS require periodic adjustments.
• Tax accuracy: Adjustments affect the 21% U.S. corporate tax rate as of January 2026.
This understanding also helps when you analyze US stocks because clean financials indicate good management.
Most common types of adjusting entries
Several types of adjustments appear in almost every accounting cycle. Recognizing them helps you choose the right treatment.
• Prepaid expenses: Payments made in advance for benefits spanning more than one period.
• Unearned revenue: Cash received before goods or services are delivered.
• Depreciation: Allocation of an asset's cost over its useful life.
• Accrued expenses: Expenses incurred but not yet paid or recorded.
• Accrued revenue: Revenue earned but not yet billed.
• Bad debt: Estimated loss from uncollectible accounts under IFRS 9.
For investors, reading these adjustments supports fundamental analysis of a company.
Example of adjusting entry for prepaid expenses
On April 1, 2026, a company pays $12,000 for one year of rent. Each month, $1,000 rent expense is recognized. Adjusting entry on December 31, 2026: Rent Expense (Dr) $9,000, Prepaid Rent (Cr) $9,000.
1. Calculate monthly expense: $12,000 / 12 = $1,000.
2. Determine months used: April-December = 9 months.
3. Total expense: 9 x $1,000 = $9,000.
4. Record entry: Rent Expense (Dr) $9,000, Prepaid Rent (Cr) $9,000.
Besides rent, companies with digital assets may need to adjust for crypto tax liabilities.
Example of adjusting entry for unearned revenue
A company receives $6,000 on October 1, 2026, for 6 months of service. Monthly revenue is $1,000. By December 31, 2026, revenue earned for 3 months = $3,000. Entry: Unearned Revenue (Dr) $3,000, Service Revenue (Cr) $3,000.
• Calculate monthly revenue: $6,000 / 6 = $1,000.
• Determine months used: October-December = 3 months.
• Recognize revenue: 3 x $1,000 = $3,000.
• Reduce liability: Unearned revenue decreases by $3,000.
Example of adjusting entry for depreciation
A machine is purchased on January 1, 2026, for $240,000, with residual value $40,000 and useful life 5 years. Straight-line depreciation per year = ($240,000 - $40,000) / 5 = $40,000. Per month = $3,333.
• Straight-line method: Equal expense each period.
• Entry: Depreciation Expense (Dr) $40,000, Accumulated Depreciation (Cr) $40,000.
• Profit impact: Expense reduces net income.
• Tax impact: Depreciation is deductible under IRS Publication 946 (2026).
Proper depreciation affects profit, so it matters for a crypto portfolio for beginners that also needs diversification.
Example of adjusting entries for accrued expenses and revenues
Employee salaries for December 2026 of $25,000 are unpaid as of December 31. Entry: Salary Expense (Dr) $25,000, Salaries Payable (Cr) $25,000. Interest revenue of $5,000 not yet received: Interest Receivable (Dr) $5,000, Interest Revenue (Cr) $5,000.
• Accrued expense: Expense incurred, cash not yet paid.
• Accrued revenue: Revenue earned, cash not yet received.
• Reversing entry: Often made at the start of the next period.
• Risk: Incorrect accruals can significantly change profit.
In trading, accurate reporting also matters, for example when using spot trading.
Summary table of adjusting journal entry examples
Common mistakes when making adjusting entries
Many beginners make the same mistakes, from forgetting to record to miscalculating. Here is what to avoid.
• Forgetting prepaid expenses: Causes expenses too low and profit too high.
• Missing accrued salaries: Liabilities unrecorded, profit overstated.
• Miscalculating depreciation: Asset value and expense inaccurate.
• Not making reversing entries: Accounts mixed between periods.
• Ignoring bad debt: Receivables unrealistic, profit too high.
• Lack of documentation: Difficult to audit and tax review.
Checklist before closing the books
Use this checklist to ensure no adjustment is missed.
1. Review all prepaid expenses: Ensure they are allocated to the correct period.
2. Calculate depreciation: Use a consistent method.
3. Record accrued expenses: Salaries, interest, rent not yet paid.
4. Record accrued revenues: Interest receivable, service receivable.
5. Evaluate bad debt: Use IFRS 9 expected credit loss estimates.
6. Make reversing entries: For accruals to be paid next year.
7. Reconcile balances: Match with the general ledger.
Conclusion
Adjusting journal entries are the key to accurate financial statements. By understanding the examples above, you can avoid fatal mistakes. Always follow accrual and matching principles. As of January 2026, IFRS and GAAP standards continue to tighten. For investors, clean financials aid fundamental analysis. Start building a smart portfolio by understanding financial statements.
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