Why adjusting entries exist
Objective: Classify adjustments and identify when one is needed.
Recommended first: Accrual basis vs cash basis
Adjusting entries are recorded at period end so that revenue and expenses land in the right period. Every adjustment touches one balance-sheet account and one income-statement account, and almost never Cash.
| Type | Before adjustment | Adjustment |
|---|---|---|
| Prepaid expense | Asset overstated | Dr Expense / Cr Prepaid |
| Unearned revenue | Liability overstated | Dr Unearned / Cr Revenue |
| Accrued expense | Nothing recorded | Dr Expense / Cr Payable |
| Accrued revenue | Nothing recorded | Dr Receivable / Cr Revenue |
| Depreciation | Asset cost unallocated | Dr Depreciation Expense / Cr Accumulated Depreciation |
A practical way to find adjustments is to review each balance-sheet account: Is Prepaid Insurance still correct after this month's coverage? Is the supplies balance supported by a count? Are any wages, interest, or utilities owed but unrecorded? Has any unearned revenue been earned? Has depreciation been recorded?
Check your work
- Does each adjustment involve one balance-sheet and one income-statement account?
- Is Cash absent from every adjustment?
- Are calculations stated and exact?
$1,200 prepaid for 12 months; one month used.
| Account | Debit | Credit |
|---|---|---|
| Insurance Expense | $100.00 | |
| Prepaid Insurance | $100.00 |
Common mistakes
✗ Crediting Cash in an adjusting entry.
✓ Adjustments reallocate amounts already recorded or accrue unrecorded ones.
Guided practice
Use hints freely here.
Item 1 of 1
Adjust prepaid insurance
On January 1, Greenway Landscaping paid $3,240.00 for 12 months of insurance and debited Prepaid Insurance. Record the adjustment at Mar 31, 2026 if no insurance expense has yet been recorded and 3 months of coverage need to be expensed now.
Independent practice
Try these without hints. Completing the lesson needs at least one independent item solved without revealing the answer.
Item 1 of 4
Adjust prepaid rent
On April 1, Northlight Design Studio paid $5,250.00 for three months' rent (April–June) and debited Prepaid Rent. Record the April 30 adjustment.
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Key terms
- Adjusting entry
- A period-end entry that updates accounts for accruals and deferrals.
- Prepaid expense
- A cost paid before it is used.
- Accrued revenue
- Revenue earned but not yet billed or received.
References and provenance
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting (accessed 2026-10-29)
Original lesson written for Bookkeeping Exercises (AI-assisted drafting). Calculations are verified by the platform's automated accounting tests. Not yet reviewed by a credentialed accountant. Updated 2026-10-29.