Bookkeeping · Reconciliation & Close · Guide · Working level
Adjusting entries: the four families and how to post them
Accrued expenses, accrued revenue, prepaids and deferrals, and depreciation — what each adjusting entry does, the journal entry for each, how reversals work, and which adjustments belong to your accountant.
Adjusting entries exist because cash moves on its own schedule and reality moves on another. Rent paid in December covers January; work done in June gets billed in July; a machine bought once gets used for seven years. Adjusting entries are the month-end journal entries that put income and expense into the month they belong to — and every one of them comes from one of four families: accrued expenses, accrued revenue, deferrals (prepaids and deferred revenue), and depreciation.
If you can post those four patterns, you can close a month on the accrual basis. This guide shows the entry for each, the reversal mechanics that keep accruals from double-counting, and the line where do-it-yourself adjustments should stop and the accountant should take over.
The map: four families, one pattern
The adjusting-entry families at a glance:
| Family | Cash moves… | The month-end entry | Balance-sheet partner |
|---|---|---|---|
| Accrued expense | After the expense | Debit expense, credit liability | Accrued expenses payable |
| Accrued revenue | After the revenue | Debit receivable, credit revenue | Accrued/unbilled receivables |
| Prepaid expense (deferral) | Before the expense | Debit expense, credit asset | Prepaid expenses |
| Deferred revenue (deferral) | Before the revenue | Debit liability, credit revenue | Deferred revenue |
| Depreciation | Once, at purchase | Debit expense, credit contra-asset | Accumulated depreciation |
The symmetry is worth internalizing: accruals recognize before cash, deferrals recognize after cash, and depreciation is a deferral stretched over years. In every case one leg hits the profit and loss statement and the other leg parks on the balance sheet, where it waits for cash (or usage) to catch up.
Family 1: accrued expenses
You have used something — utilities, contractor hours, interest — but no bill has arrived by month-end. Accrue it so the month carries its own costs.
| Account | Debit | Credit |
|---|---|---|
| Contract labor expense | 2,400.00 | |
| Accrued expenses payable | 2,400.00 |
Estimate from the contractor's hours or agreement. Precision to the dollar is not required; getting the cost into the right month is.
Interest on loans accrues the same way when the payment date straddles month-end; regular loan payments themselves need the principal/interest split covered in loan balance reconciliation. When accruals are worth the effort at small scale — and when they are not — is the subject of accrued expenses explained.
Reversal mechanics
The accrual's companion is the reversing entry, posted (usually automatically) on day one of the next month:
| Account | Debit | Credit |
|---|---|---|
| Accrued expenses payable | 2,400.00 | |
| Contract labor expense | 2,400.00 |
June now starts with a 2,400.00 credit in contract labor. When the real invoice for 2,400.00 is entered normally in June, it nets against the reversal to zero — May keeps the expense, June keeps none of it.
The reversal is what makes accruals sustainable: nobody has to remember, when the invoice arrives, that part of it was already expensed. The routine bill entry stays routine, and the arithmetic takes care of itself. If the invoice arrives at 2,520.00 instead of 2,400.00, June simply shows the 120.00 difference — a self-correcting estimate. Set every expense and revenue accrual to auto-reverse; an accrual without a reversal (or a schedule) is a future error.
Family 2: accrued revenue
The mirror image: you have earned income — work performed, goods shipped — but have not yet invoiced by month-end.
| Account | Debit | Credit |
|---|---|---|
| Unbilled receivables | 3,000.00 | |
| Consulting revenue | 3,000.00 |
Reverses June 1. The June invoice then posts normally to accounts receivable and revenue, and the reversal cancels the duplicate revenue.
Use a separate "unbilled receivables" account rather than regular AR, so the aged receivables report — which drives collections — contains only real invoices customers actually owe against.
Family 3: deferrals — prepaids and deferred revenue
Deferrals handle cash that arrived early. Paying twelve months of insurance in January does not make January twelve times as expensive; the payment lands in an asset and each month takes its slice:
| Account | Debit | Credit |
|---|---|---|
| Insurance expense | 200.00 | |
| Prepaid insurance | 200.00 |
One-twelfth per month. The prepaid schedule — item, total, months, monthly amount, remaining balance — is the control; the GL balance must tie to it.
Deferred revenue is the same machine run in reverse: a customer's 6,000.00 annual prepayment is a liability until earned, released at 500.00 a month by debiting deferred revenue and crediting revenue. Deferrals do not reverse — they run off schedules until the balance hits zero. The schedule formats and maintenance routines are in prepaid expenses and amortization and the deferred revenue schedule.
Family 4: depreciation
A 21,000.00 machine with a seven-year life costs the business 250.00 a month in usage, and the books should say so:
| Account | Debit | Credit |
|---|---|---|
| Depreciation expense | 250.00 | |
| Accumulated depreciation — equipment | 250.00 |
Credit the contra-asset, never the asset itself — the balance sheet should show original cost and accumulated depreciation as separate lines.
Book depreciation follows the fixed-asset schedule; tax depreciation — MACRS lives, Section 179 expensing, bonus depreciation elections — is computed by your accountant on Form 4562 under the rules in Publication 946. Small businesses commonly just book the tax numbers monthly to avoid keeping two schedules; how to tie your monthly entry to the accountant's schedule between returns is covered in the monthly depreciation entry, with the concepts at /fundamentals/depreciation-basics.
How the families divide the work
Where a typical small service business's adjusting-entry effort actually goes:
Illustrative distribution; product and inventory businesses shift weight toward accruals and cost adjustments.
The comforting implication: most of the monthly adjusting workload is schedule-driven — the same entries, the same amounts, month after month. Set the schedules up once and the close's adjustment phase becomes twenty minutes of posting and tying.
When the adjustment belongs to the accountant
There is a bright line between posting adjustments and designing them. Post routine accruals, scheduled amortization, and scheduled depreciation yourself. Hand the following to the accountant:
- Method choices and elections — depreciation methods, Section 179 and bonus elections, the choice between cash and accrual basis itself. Changing an established accounting method generally requires Form 3115, not a journal entry.
- Inventory and cost capitalization — year-end inventory adjustments, UNICAP, cost-of-goods judgment calls.
- Bad debts — writing off a receivable is easy; the tax rules on when a deduction exists are not.
- Anything touching a filed year — corrections to closed, filed periods, per the reopening discipline in the month-end close checklist.
- Year-end true-ups — the accountant's adjusting journal entries after preparing the return, which you should post back into the ledger exactly as provided so the books match the filing.
A closing sequence for the adjustment phase
Within the month-end close, run the adjustments in this order:
- Confirm reconciliations are done — accruing against unreconciled cash is guessing twice.
- Post reversals (verify the auto-reversals actually posted).
- Post schedule-driven entries: prepaids, deferred revenue, depreciation, loan splits.
- Post estimate-driven accruals: expenses, then revenue.
- Tie every affected balance-sheet account to its schedule.
- Read the P&L for reasonableness before producing statements.
Do that every month and the accrual basis stops being an accountant's mystery and becomes what it actually is: five small patterns, repeated.
Frequently asked questions
- What are adjusting entries in bookkeeping?
- Adjusting entries are journal entries posted at the end of a period to move income and expenses into the month they actually belong to, regardless of when cash moved. The four families are accrued expenses, accrued revenue, deferrals (prepaid expenses and deferred revenue), and depreciation. Together they convert raw cash-flow records into accrual-quality statements.
- What is a reversing entry and why use one?
- A reversing entry is the exact mirror of an accrual, posted automatically on the first day of the next period. It exists so that when the real bill or payment is later recorded in the ordinary way, the reversal cancels it and the expense is not double-counted. Reversals let you accrue precisely at month-end without changing how routine transactions are entered.
- Do cash-basis businesses need adjusting entries?
- Mostly no — a cash-basis taxpayer recognizes income when received and expenses when paid, so accruals and deferrals are unnecessary for tax. But even cash-basis books should post depreciation and split loan payments into principal and interest, or the balance sheet misstates assets and debt all year. Prepaid rules like the 12-month rule can also apply.
- Which adjusting entries should I leave to my accountant?
- Leave to the accountant anything that changes tax method or requires judgment across years: the depreciation method and first-year elections, inventory and cost capitalization adjustments, bad-debt write-off methods, accounting-method changes on Form 3115, and any prior-year correction after a return is filed. Post routine monthly accruals, prepaid amortization, and scheduled depreciation yourself.