Adjusting Journal Entry: What It Is & How Bookkeepers Use It

It's March 31. You're closing the month. The bank feed is clean. Then you check the Stripe fee account: Stripe swept $4,200 in processing fees on April 2. The expense belongs to March. Cash hasn't moved yet.

That's what an adjusting journal entry is for. AJEs record what belongs in the period, not when cash moved. Without them, March P&L understates expenses and overstates net income. Catch it at close, not at year-end.

What is an adjusting journal entry?

An adjusting journal entry (AJE) is a manual journal entry posted at the end of an accounting period to match revenues and expenses to the correct period. AJEs don't follow a bank transaction. They record what the bank feed misses: expenses incurred before cash leaves, revenue earned before cash arrives, prepaid amortization, and depreciation. A typical month-end close has 5-15 adjusting entries. Missing one can shift net income by thousands of dollars.

Key Takeaways

• AJEs correct timing gaps - revenue and expenses belong in the period earned or incurred, not when cash moves
• Four standard types - accruals, deferrals, depreciation/amortization, and estimate adjustments
• 5-15 entries per close is typical - a business with payroll, prepaids, and equipment will run more
• Missing AJEs distort net income - a single missed Stripe fee accrual can misstate expenses by thousands
• Accruals reverse next period - to avoid double-counting when the actual bill posts
• Every AJE needs documentation - memo, source document, period designation, reversal note

What an Adjusting Journal Entry Actually Is

An adjusting journal entry is a double-entry bookkeeping transaction posted manually at period-end. It doesn't follow a bank movement. Its job is to align the books with accrual accounting, where income and expenses are recognized when earned or incurred, not when cash moves.

Every AJE debits one account, credits another. An accrued expense: expense account + liability. A deferral: asset + expense. Depreciation: depreciation expense + accumulated depreciation. The logic is consistent throughout: correct the balance to match economic reality for the period.

AJEs are the last step before you run the trial balance and send financials.

The Four Types of Adjusting Entries

Accruals

An accrual records revenue or expense that occurred but hasn't been paid or received yet.

Accrued expense: Your client has a $3,600 monthly software contract. The vendor invoices quarterly. At month-end, the expense is incurred but the bill hasn't arrived. Debit Software Expense $3,600, credit Accrued Liabilities $3,600. Reverse next period when the invoice posts.

Accrued revenue: A client completes a project in March but doesn't invoice until April. Debit Accounts Receivable, credit Revenue for March.

Accruals almost always reverse next period. Skip the reversal and the actual bill double-counts the expense.

Deferrals

A deferral records cash that moved before the revenue was earned or the expense incurred.

Prepaid expense: Your client pays $12,000 for an annual insurance policy in January. The $12,000 sits on the balance sheet as a prepaid asset. Each month you debit Insurance Expense $1,000 and credit Prepaid Insurance $1,000 until it's consumed.

Unearned revenue: Your client collects a $6,000 retainer upfront. It's a liability until work is performed. Each month you move $500 from Unearned Revenue to Revenue.

Deferrals don't reverse. The balance sheet account depletes as the asset is consumed or the liability earned off.

Depreciation and Amortization

Equipment and vehicles don't expense all at once. Depreciation spreads the cost over the asset's useful life.

At month-end, debit Depreciation Expense and credit Accumulated Depreciation. A $24,000 vehicle with a 5-year straight-line life = $400/month. Same logic for intangible asset amortization.

Depreciation entries don't reverse. They accumulate in the Accumulated Depreciation account.

Adjustments to Estimates

Some balances require judgment.

Bad debt: If your client has $50,000 in AR and 3% historically goes uncollected, you accrue $1,500. Debit Bad Debt Expense, credit Allowance for Doubtful Accounts.

Inventory write-downs: Reduce obsolete or damaged inventory to net realizable value. Debit COGS or a write-down expense, credit Inventory.

These are judgment calls, not calculations. Document the methodology and get CPA sign-off.

How Bookkeepers Actually Use AJEs

When in the close cycle

AJEs go in last, after the bank feed is reconciled and all transactions are categorized. Typical close sequence:

1. Reconcile all bank and credit card accounts
2. Categorize uncategorized transactions
3. Review the trial balance for anomalies
4. Post adjusting entries
5. Run the adjusted trial balance and send financials

Posting AJEs before reconciliation creates double-counts that are hard to untangle.

Who books them

Recurring AJEs (depreciation, prepaids) are booked by the bookkeeper. Estimate-based entries (bad debt, inventory adjustments) need CPA review. Standard flow: bookkeeper prepares the schedule, CPA reviews, bookkeeper posts.

Keep that schedule as a checklist. Each line: account, amount, memo, source document, whether it reverses.

Documentation requirements

Every AJE needs a memo (what it records and why), a source document (invoice, amortization schedule, depreciation table), a period designation (last day of the period, not today), and a note on whether it reverses.

If a new bookkeeper picks up the file next quarter, they should understand every entry without calling you.

Common Gotchas

Reversals in the wrong direction

The reversal is the mirror image of the original: debit becomes credit, credit becomes debit. Getting this backwards doubles the original entry. Your expense is 2x what it should be, and it's hard to spot without comparing periods.

Fix: use your GL's auto-reversal feature. Set the reversal date when you post the original.

Missing recurring entries

Stripe charges processing fees daily but sweeps them weekly or monthly. Payroll cutoffs create expense in one period with cash in another. Without a recurring AJE checklist, these slip through. You close March, net income looks solid, then the CPA asks in April why Stripe fees are 40% lower than February.

Fix: build the checklist during onboarding. Identify all recurring AJE candidates before you commit to a close fee.

AJE booked to a closed period

You catch a missing entry on April 5 that belongs to March. But March is closed and financials are sent. Posting to March changes numbers the client has already used.

Fix: set a close lock date in your GL. After lock, late entries post to the current period with a memo noting the period they relate to. Tell clients upfront: financials are finalized 10 business days after month-end.

Accrual not reversed, bill posts anyway

You accrue $3,600 in March. In April, the actual invoice posts and gets categorized as software expense. If no reversal was set, software expense now has $7,200 for April. The accrual stacks on top of the real bill.

Fix: before closing any period, verify every accrual entry has a reversal scheduled.

How Growthy Handles Adjusting Entries

Growthy doesn't automate the judgment part of AJEs. But it cuts setup time.

When you import a client's books, Growthy flags recurring transactions that look like AJE candidates: prior-period amortization entries, depreciation schedules, regular Stripe fee sweeps. You get a candidate list to review, not a blank checklist.

For close: Growthy categorizes bank activity, you review and approve, then layer AJEs on top. The reconciliation that took 3 hours before AJEs now takes under an hour.

Available at $99/mo during alpha (2-year lock-in). Built by a CPA firm partner who still closes books monthly.

Frequently Asked Questions

What's the difference between an adjusting journal entry and a regular journal entry?

Regular journal entries record actual transactions: cash received, bills paid, transfers. AJEs correct timing. They record expenses before cash leaves, revenue before cash arrives, and prepaid amortization. AJEs follow the accrual principle: income and expenses belong in the period they occur, not when cash moves.

When should adjusting entries be posted?

After bank reconciliation is complete, before the trial balance is finalized. That's the last business day of the month or the first few days after. Never post AJEs before reconciliation or you'll create overlapping entries that are hard to untangle.

Do all adjusting entries need to be reversed?

No. Accrual entries (expenses or revenue recorded before cash moves) typically reverse at the start of the next period to avoid double-counting. Deferral entries and depreciation do not reverse. The rule: if the entry will be replaced by an actual transaction next period, set a reversal.

What accounts do adjusting entries affect?

Every AJE hits one income statement account and one balance sheet account. Depreciation: depreciation expense + accumulated depreciation. Accrued expense: expense account + accrued liabilities. Prepaid: expense account + prepaid asset. AJEs never hit cash. If your entry involves cash, it's not an adjusting entry.

How many adjusting entries does a typical client need each month?

5-15 for a small business. A company with employees, fixed assets, and prepaid contracts will run more than a solo consultant. New clients often have fewer because prior bookkeepers skipped them. Part of onboarding is identifying every recurring AJE candidate before you commit to a close fee.

Ready to cut your reconciliation time before you even get to AJEs? Try Growthy free. For adjacent close-cycle definitions, see the full glossary.