An adjusting entry is a journal entry made at the end of a period to record revenue earned or expenses incurred that have not yet been captured, so the statements are accurate.
Under accrual accounting, some revenue and expenses are not triggered by a cash transaction, so they must be recorded with adjusting entries at period-end. Common examples include recording depreciation, accruing wages or interest owed but not yet paid, recognising earned portions of deferred revenue, and expensing the used portion of prepaid costs.
Adjusting entries ensure revenue and expenses land in the correct period, which is the whole point of accrual accounting. They are a routine part of month-end and year-end close, and a frequent focus of an accountant's review because they can shift income between periods.
At year-end, employees have earned $4,000 of wages that will be paid in January. An adjusting entry records the $4,000 as an expense and a liability in December, so the profit for the year is accurate.
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