Introduction To Adjustments
Adjusting entries are made at the end of an accounting period. They help match income and expenses to the right time they happened. Learning how to adjust entries in accounting is important because, without proper adjustments, your financial reports may show wrong profits or losses. Each entry changes two accounts—one from the balance sheet and one from the income statement. You need to find the correct amounts, then choose which account to debit and which to credit. After that, you add these entries to the company’s general ledger.
These entries are recorded just like normal journal entries. The primary goal is to accurately reflect the timing of money earned or spent, adhering to the principles of accrual accounting. They make sure no income or expense is missed or recorded twice. This keeps your financial records clear and consistent. Adjusting entries also help businesses meet legal and tax rules. Without them, reports can show the wrong income or expenses for a period. This may lead to confusion or wrong decisions. That’s why knowing how to adjust entries is key for any business.
What Are Adjusting Entries?
Adjusting entries in accounting are changes made in the accounts to fix timing issues. They ensure that money earned or spent is recorded in the correct period. Think of them as updates to income and expenses we do before creating financial reports.
We usually do this at the end of each month or year to ensure everything is recorded correctly. Doing this gives us a real snapshot of what the business earned and spent. If we don’t do this, things could get messy. Sometimes, we slip up and miss writing down about money we get or spend, or we write it down at the wrong time. These mistakes mess with keeping our financial records right, honest, and all there. Like, say we have bills waiting to be paid, or cash we’ve made but haven’t been paid yet, or even if we paid for something way early.
Key Takeaways:
- When a business uses accrual accounting, adjusting entries ensure that the account amounts used in financial statements and management analyses are accurate.
- Periodicity is an accounting concept that categorizes current business results into distinct periods, such as months, quarters, or years. This leads to the need for adjusting entries in accounting.
- It is possible to make three main types of changing entries: estimates, deferrals, and accruals.
- Using the right accounting software is the best way to handle the critical yet sometimes challenging aspect of standard accounting, known as “adjusted entry accounting.”
Why do Adjustments Matter?
They give a clear picture of your company’s financial health. Adjustments help avoid mistakes like missing revenue or expenses. This leads to more accurate decision-making. They also help follow basic accounting rules by matching income and related costs in the same period. Without adjustments, your reports might show wrong profits or losses. In simple words, adjustments keep your accounts clear, correct, and trustworthy.
Shows Real Financial Picture
Adjusting entries are important because they ensure your income and expenses are recorded in the correct period. Think of it this way: you get an accurate picture of how your business is performing. No missing information and no overblown numbers. They fix timing errors in your books. This also helps clarify things when you’re trying to determine whether you’re making money or losing it. Plus, your monthly and yearly reports become way more trustworthy. They give you the real deal on what’s happening in your company.
Compliance and integrity
Adjusting entries help your business to follow proper accounting standards. They keep your financial records clean and accurate. This builds confidence among banks, investors, and auditors. It also helps avoid legal or tax problems. Learning how to adjust entries in accounting ensures your books are always up to date and reflect the true financial position of your business.
- Follows the matching principle in accounting
- Keeps records up to date and honest
- Builds trust with stakeholders
- Supports smooth audits and reviews
- Helps meet tax and legal requirements
Who Uses Adjustments?
All businesses that use accrual accounting need them. Small businesses may use spreadsheets, while larger ones rely on software or bookkeepers. Each method helps keep accounts up to date. Even very small businesses or freelancers need to make adjustments to track what they earn or spend. These entries help make sure nothing is left out or counted twice. They also help businesses get ready for tax time. No matter the size, using adjustments keeps records clear and correct.
Small Businesses and Freelancers
Small businesses and freelancers use adjusting entries to stay on top of their income and expenses. They often handle records on their own or with simple tools. This helps them avoid mistakes and keep things ready for taxes.
- Use spreadsheets or basic accounting apps.
- Track income that hasn’t been received yet
- Record bills or expenses not yet paid
- Prepare accurate monthly or yearly reports
- Stay organized for tax filing and audits
Large Companies and Corporations
To keep track of complicated accounting, big businesses make changes all the time. They have accounting teams and employ modern software to do this. It helps them follow the law and make precise financial reports. Understanding how to adjust entries in accounting is essential for these companies to ensure every transaction is recorded at the right time and in the right place.
- Use software like SAP, Tally, or QuickBooks.
- Follow the laws of accounting (GAAP/IFRS)
- Change things every month or every three months.
- Make sure that reports for investors and audits are correct.
- Handle a lot of money coming in and going out.
Types of Adjustments
Accrued Income
Definition:
Accrued income, in essence, is income that you have earned but have not received yet. Think about a situation where you have completed a job or dispatched a product, nevertheless, the payment is still not with you. It is necessary to register that income immediately at the time of earning it. This way, your financial records remain correct, thus each accounting period shows the true state of affairs.
Example:
A web developer finished a website on June 29 and is to be paid ₹18,000 in July.
| Date | Description | Debit (₹) | Credit (₹) |
| June 29 | Accounts Receivable | 18,000 | |
| June 29 | Service Revenue | 18,000 |
This ensures the income shows up in June when the work was done.
Outstanding Expense
Definition:
An outstanding expense occurs when a company has already benefited from a service but hasn’t yet paid for it or recorded it as an expense. Think of things like the water bill, employee paychecks, or loan interest that you’ll pay down the road. The main thing is to match the expense to when it actually happened, not when the cash goes out the door. This helps keep the books straight and gives a clearer view of the company’s finances.
Example:
A small business has to pay ₹3,000 for cleaning services done in March, but the bill arrives in April.
| Date | Description | Debit (₹) | Credit (₹) |
| March 31 | Cleaning Expense | 3,000 | |
| March 31 | Accrued Expenses | 3,000 |
This records the cost in March when the service was used.
Deferred Revenue
Definition:
Advance money received before the delivery of a good or service is deferred revenue. The company cannot immediately count this as earned income since the work is not yet completed. Instead, it is recognized as a liability—unearned revenue—and incrementally changed into income as the project is completed. This stops one from inflating profits for the wrong period.
Example:
A freelance trainer receives ₹40,000 in May for a 4-day workshop to be conducted in June.
Initial Entry (May):
| Date | Description | Debit (₹) | Credit (₹) |
| May 1 | Cash | 40,000 | |
| May 1 | Unearned Revenue | 40,000 |
Adjusting Entry (June after training):
| Date | Description | Debit (₹) | Credit (₹) |
| June 30 | Unearned Revenue | 40,000 | |
| June 30 | Training Revenue | 40,000 |
Deferred Expense
Definition:
Advance payment for products or services to be utilized in later periods is a deferred expense. It is dispersed over time rather than writing down all at once as an expense. Originally an asset, this kind of expense turns over time. It guarantees that the cost matches the benefit period.
Example:
A company pays ₹18,000 on January 1 for a 6-month advertising campaign.
Initial Entry (Jan):
| Date | Description | Debit (₹) | Credit (₹) |
| Jan 1 | Prepaid Advertising | 18,000 | |
| Jan 1 | Cash | 18,000 |
Monthly Adjustment (Jan–Jun):
| Date | Description | Debit (₹) | Credit (₹) |
| Jan 31 | Advertising Expense | 3,000 | |
| Jan 31 | Prepaid Advertising | 3,000 |
This continues each month until June.
Depreciation & Amortization
Definition:
The steady decrease in an asset’s value over time is called depreciation and amortization. While amortization is for intangible assets like patents or software, depreciation is for physical assets such as equipment or automobiles. This helps spread the asset’s cost over the years it is used. It also shows loss of value or wear and tear.
Example:
A computer is bought for ₹60,000 on April 1 and will be used for 3 years. No resale value is expected.
Annual Depreciation = ₹60,000 ÷ 3 = ₹20,000
Monthly Depreciation = ₹20,000 ÷ 12 = ₹1,667
Monthly Entry:
| Date | Description | Debit (₹) | Credit (₹) |
| Apr 30 | Depreciation Expense | 1,667 | |
| Apr 30 | Accumulated Depreciation | 1,667 |
This is done every month for 3 years.
Bad Debt Provision
Definition:
Bad debt provision is an estimate of the money a business anticipates not to receive from its clients. Some consumers could postpone or reject payment, so, rather than waiting until that occurs, a company reserves a sum ahead of time. This makes reports more realistic and prevents overestimation of receivables. It draws from past trends or present risks.
Example:
A company has ₹1,50,000 in receivables. It expects 6% may go unpaid.
Provision = ₹1,50,000 × 6% = ₹9,000
Entry:
| Date | Description | Debit (₹) | Credit (₹) |
| Year-End | Bad Debt Expense | 9,000 | |
| Year-End | Provision for Bad Debts | 9,000 |
This adjustment prepares the business for potential losses.
Why Adjusting Entries Are Important
They ensure that money in and out is listed in the correct month or year. Mistakes found when checking accounts can be fixed. This makes the financial reports more true and valuable. By using changing entries, you can ensure that nothing is too much or missing by matching what the company did with what the records indicate. This makes it clear how much was made or spent over some years. Additionally, they help prevent unpleasant surprises when dealing with taxes or audits. Without these changes, reports may provide an inaccurate view of the company’s performance. In short, they keep your accounts clean, honest, and up to date — a concept often emphasized in every accounting training institute in Bangalore that teaches proper financial reporting practices.
Improving the Reliability of Financial Statements
- Helps prevent displaying false profit or loss
- Simplifies and clarifies reportage
- Creates trust with investors, auditors, and banks.
- Repairing missed or delayed records helps reduce errors.
- Guarantees adherence to conventional accounting standards like GAAP.
10-Step Adjustment Process
Start by reviewing your trial balance for any missing or incorrect information. List all adjustments like revenue delays or unpaid expenses. Record them in your journal and then update your ledger and trial balance.
Steps to Record Adjusting Entries
- Check the Trial Balance for Mistakes
Look at the unadjusted trial balance to spot anything that doesn’t look right. This helps find income or expenses that are missing or wrongly recorded.
- Know What Kind of Adjustment You Need
Figure out which type of adjustment is needed—like unpaid income, unpaid bills, prepaid items, advance payments, depreciation, or bad debt.
- Make the Right Journal Entries
Write down the adjusting entries with the correct accounts. These usually involve both a balance sheet and an income statement account.
- Adjust for Income and Expenses That Are Due
Add any income you earned but haven’t recorded yet, and any expenses you owe but haven’t included. This helps keep the records accurate.
- Update Prepaid and Unearned Items
Adjust for things you paid for in advance (like rent or insurance) or money you received before doing the work (like training fees).
- Record Estimates Like Depreciation or Bad Debt
Use estimation methods like straight-line depreciation or percentage of sales to account for assets losing value or expected customer non-payment.
- Write Entries in the General Journal
Record all your adjustments in the journal so they are officially added to your accounting records.
- Update the General Ledger Accounts
Post the adjusting entries from the journal into the ledger to keep account balances current.
- Create the Adjusted Trial Balance
Create a new trial balance after making all necessary adjustments to ensure everything adds up correctly.
- Prepare Final Financial Reports
Use the adjusted trial balance to create financial statements like the income statement, balance sheet, and cash flow statement. These show your business’s true financial health.
Real-Life Examples
- Interest Earned Late: If a company earns ₹5,000 interest in December but gets the money in January, it still needs to show that ₹5,000 as income in December’s records. This is called accrued revenue.
- Advance Rent Payment: If a business pays ₹60,000 for 6 months’ rent in January, it should not record the whole amount as January’s expense. Instead, it should record ₹10,000 per month. This is a deferred expense.
- Unpaid Utility Bills: If the electricity bill for March (₹3,500) arrives in April, it should still be shown as a March expense. This is an accrued expense adjustment.
Automation Tools
Modern accounting software can manage modifying entries with less manual labour. These techniques save time and help to cut errors. For expanding companies dealing with sophisticated data, automation is useful. Automatic tracking of due dates, unpaid invoices, and prepaid expenses, as well as the automatic calculation of depreciation, helps the system with automation. This means less time devoted to handmade activities and fewer errors made. Tally, Zoho Books, and QuickBooks are among the tools that allow you to set up regular inputs and alerts. They also create reports indicating when each modification was implemented. This helps keep your accounts clean, up-to-date, and ready for audit or review at any time.
Conclusion
Knowing how to adjust accounting entries is crucial if you want to maintain accurate and up-to-date financial records. These logs let you fairly associate costs and revenues to the proper period, hence giving an honest view of your company’s success. Every correction is critical for accurate reporting, whether it involves accruals, deferrals, or projections. Those who wish to improve this ability might consider enrolling in a practical accounting training in Bangalore, which will provide them with hands-on experience and real-world knowledge. Proper training will allow you to apply these concepts confidently in any accounting position.
FAQs
Q1. What does it mean to adjust something in accounts?
It means adding things you forgot like unpaid bills or earnings not written down yet.
Q2. How do I know if something is missing?
Ask yourself: did I get or use something but didn’t write it in my books? If yes, it needs to be added.
Q3. Do small shops or businesses need to do this?
Yes, even small businesses should do it to keep records correct.
Q4. Can I use any tools to help me?
Yes! Tools like Tally or Excel can make it easier to find and add missing items.
Q5. What happens if I don’t make these adjustments?
Your accounts may show wrong profit or loss, which can cause confusion or problems later.
