Guides
Adjusting Entries: The 5 Types, With Examples
Adjusting entries are journal entries recorded at the end of an accounting period to match revenues and expenses to the period they belong to, before financial statements are prepared. Under accrual accounting, cash timing and economic timing rarely line up, so five recurring adjustments (accrued revenue, accrued expense, deferred revenue, prepaid expense, and depreciation) correct the accounts at period close.
What are adjusting entries?
Adjusting entries are period-end journal entries that update account balances so revenues and expenses land in the period they were earned or incurred, not the period cash moved. Each one touches at least one income statement account and one balance sheet account. They never involve cash, because the cash event happened in a different period or has not happened yet.
They exist because the accrual basis of accounting, required under U.S. GAAP for most companies, splits continuous business activity into fixed periods (months, quarters, years). The revenue recognition principle (ASC 606) says revenue is recorded when earned. The matching principle says expenses are recorded in the same period as the revenue they helped produce. Adjusting entries enforce both.
Companies using strict cash-basis accounting skip most of these. The IRS permits cash-basis for many businesses with average annual gross receipts of $30 million or less (2025 threshold), but GAAP financial statements require accrual, which makes adjusting entries mandatory. See cash vs accrual accounting for where that line falls.
Why adjusting entries matter
Adjusting entries keep the income statement and balance sheet honest at period close. Without them, revenue can appear in the wrong month, expenses can be missing, and asset values can be overstated. The result is a trial balance that ties out but tells the wrong story.
An unadjusted trial balance is the starting point. Adjusting entries move it to an adjusted trial balance, which feeds the financial statements. Skipping a wage accrual, for example, can understate expenses and overstate net income in the same period, which distorts margins and can misstate taxes owed.
The 5 types of adjusting entries
The five standard adjusting entries fall into three families: accruals (revenue or expense recorded before cash), deferrals (cash recorded before revenue or expense is earned or used), and estimates such as depreciation. Each corrects a specific timing gap between when cash moves and when the economic event occurs.
1. Accrued revenue
Accrued revenue records income earned but not yet billed or received by period end. The adjusting entry debits a receivable (an asset) and credits revenue. It pulls earned revenue into the correct period so the income statement reflects work actually completed.
Example: a consulting firm finishes $8,000 of work in March but invoices on April 5. On March 31, debit Accounts Receivable $8,000, credit Consulting Revenue $8,000. When the client pays in April, the receivable clears and no new revenue is recorded.
2. Accrued expense
Accrued expense records a cost incurred but not yet paid or billed. The entry debits an expense and credits a payable (a liability). Common cases include wages earned but unpaid, interest owed, and utilities used but not yet invoiced.
Example: employees earn $8,500 in the last week of April, but payroll runs in early May. On April 30, debit Wages Expense $8,500, credit Wages Payable $8,500. This is the mechanism behind an accrued liability on the balance sheet, and it keeps April’s expenses complete.
3. Deferred (unearned) revenue
Deferred revenue adjusts cash collected before the goods or services are delivered. The original cash receipt is booked as a liability. At period end, the portion now earned is moved to revenue: debit Unearned Revenue, credit Revenue.
Example: a customer prepays $600 for a six-month subscription on January 1. Each month, $100 is earned. The January 31 entry debits Unearned Revenue $100 and credits Subscription Revenue $100. The remaining $500 stays a liability until earned.
4. Prepaid (deferred) expense
Prepaid expense adjusts cash paid in advance for a benefit consumed over time. The payment is first recorded as an asset. As the benefit is used, the entry debits an expense and credits the prepaid asset.
Example: a business pays $1,200 on January 1 for a 12-month insurance policy, recorded as Prepaid Insurance. Each month $100 is used up. The January 31 entry debits Insurance Expense $100 and credits Prepaid Insurance $100, leaving an $1,100 asset.
5. Depreciation
Depreciation spreads the cost of a long-lived asset across its useful life instead of expensing it all at purchase. The adjusting entry debits Depreciation Expense and credits Accumulated Depreciation, a contra-asset account. It is a non-cash estimate, not a cash outflow.
Example: a $30,000 delivery vehicle with a five-year useful life and no salvage value, using straight-line depreciation, produces $6,000 of annual depreciation, or $500 per month. The monthly entry debits Depreciation Expense $500 and credits Accumulated Depreciation $500. Book value falls over time while the asset’s original cost stays on the books.
The 5 types at a glance
The table below runs each type through a single worked figure, showing the debit, the credit, and the statement effect. Debits sit on the left, credits on the right, following the standard debits and credits rules.
| Type | Family | Example amount | Debit | Credit | Net effect |
|---|---|---|---|---|---|
| Accrued revenue | Accrual | $8,000 | Accounts Receivable (asset) | Consulting Revenue | Revenue and assets rise |
| Accrued expense | Accrual | $8,500 | Wages Expense | Wages Payable (liability) | Expenses and liabilities rise |
| Deferred revenue | Deferral | $100/mo | Unearned Revenue (liability) | Subscription Revenue | Liability falls, revenue rises |
| Prepaid expense | Deferral | $100/mo | Insurance Expense | Prepaid Insurance (asset) | Asset falls, expense rises |
| Depreciation | Estimate | $500/mo | Depreciation Expense | Accumulated Depreciation (contra-asset) | Expense rises, book value falls |
How adjusting entries fit the closing process
Adjusting entries are recorded after the unadjusted trial balance and before the financial statements, as the second-to-last step of the accounting cycle. They convert an unadjusted trial balance into an adjusted one, which then produces the income statement, balance sheet, and cash flow statement.
The order matters:
- Record routine transactions in the journal throughout the period.
- Post to the general ledger and prepare an unadjusted trial balance.
- Identify accruals, deferrals, and estimates that need updating.
- Record adjusting entries dated the last day of the period.
- Prepare the adjusted trial balance and the financial statements.
- Close temporary accounts and, where used, record reversing entries at the start of the next period.
Reversing entries are optional first-of-period entries that undo certain accruals, so the eventual cash payment can be booked normally without double-counting. They are a bookkeeping convenience, not a separate type of adjustment.
Common mistakes to watch
The frequent errors are timing and direction. Recording an adjusting entry with a cash account is almost always wrong, because the cash event belongs to a different period. Reversing the debit and credit, or adjusting the full prepaid balance instead of only the used portion, are the next most common.
Missing an accrual is the costliest mistake, because it understates expenses or revenue and can flow straight into a misstated tax position. A month-end checklist that walks each of the five types, in the order above, catches most of these before the books close.
Frequently asked questions
What are the 5 types of adjusting entries?
The five types are accrued revenue, accrued expense, deferred (unearned) revenue, prepaid (deferred) expense, and depreciation. Accruals record revenue or expense before the cash moves. Deferrals adjust cash already received or paid as it is earned or used. Depreciation is an estimate that spreads an asset’s cost across its useful life. Each corrects a timing gap at period end.
Why are adjusting entries necessary?
Adjusting entries are necessary because accrual accounting requires revenue and expenses to be recorded in the period they are earned or incurred, not when cash moves. Financial statements cover fixed periods, but business activity does not stop at period boundaries. The revenue recognition principle and the matching principle both depend on these entries to keep each period’s results accurate.
Do adjusting entries ever involve cash?
No. A properly formed adjusting entry never touches a cash account. The cash event either happened in a prior period (prepaid expense, deferred revenue) or will happen in a future period (accrued revenue, accrued expense), or there is no cash event at all (depreciation). If a cash account appears in an adjusting entry, it is typically an error.
When are adjusting entries recorded?
Adjusting entries are recorded on the last day of the accounting period, after the unadjusted trial balance is prepared and before the financial statements. Many companies do this monthly at month-end close, and all do it at year-end. The date on the entry is the period-end date, even if the work of identifying and posting it happens a few days later.
Is depreciation an adjusting entry?
Yes. Depreciation is one of the five standard adjusting entries and is classified as an estimate. It debits Depreciation Expense and credits Accumulated Depreciation, a contra-asset account, with no cash involved. It spreads a fixed asset’s cost across its useful life, following the matching principle, so each period absorbs a share of the cost.
What is the difference between accruals and deferrals?
Accruals record revenue or expense before the related cash moves, pulling a future cash event into the current period. Deferrals do the opposite: cash is received or paid first, and the revenue or expense is recognized later as it is earned or used. Accrued revenue and accrued expense are accruals. Deferred revenue and prepaid expense are deferrals.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.