Adjusting journal entries examples: How to close the books accurately each month

Your bookkeeper sends monthly financial statements showing revenue, expenses, and profit. The numbers look reasonable. But are they accurate?

If your books only capture transactions as they happen, invoices when sent, and bills when paid, your financial statements probably misrepresent your actual business performance. Revenue might be recorded before you earn it. Expenses might appear in the wrong month. Your profit margin could be significantly off.

This is where adjusting journal entries come in. These end-of-month entries correct timing differences and ensure your financial statements reflect reality. Understanding the most common accounting adjustments examples helps you verify that your books are closing each month accurately.

Why adjusting entries matter for an accurate monthly close

Raw transaction data alone does not produce accurate financial statements, the gap between when cash moves and when economic activity occurs creates distortions that adjusting entries correct.

Accrual accounting requires matching revenues and expenses to the periods in which they occur, regardless of when cash changes hands. Your team worked during the last week of December, but payday falls in January. Without an adjusting entry, December's labor costs appear too low, and January's appear too high.

Timing differences between transactions and their economic impact are common:

1. Insurance paid annually protects twelve months, not just the month you wrote the check
2. Client retainers received upfront represent revenue you have not yet earned
3. Services consumed this month may not be billed until next month

Decision quality depends on accurate numbers. If your financial statements show artificial profit swings caused by timing rather than performance, you cannot trust them for hiring decisions, pricing analysis, or growth planning.

Professional service firms face these timing issues constantly. Project-based work, retainer agreements, and significant labor costs all create situations where adjusting entries are essential for accurate reporting.

Accrued expense adjustments

These entries record expenses you incurred but have not yet paid. The expense occurred during the month, even though the cash will not be disbursed until later.

1. Accrued payroll is the most common example for service firms.

Your team worked December 26 through December 31, but payday is January 5. To record December's actual labor costs:

• Debit: Salary Expense $8,500
• Credit: Accrued Payroll $8,500

This adjusting entry ensures December's financial statements include December's labor costs. When you pay on January 5, you reverse the accrual and record the actual payment:

• Debit: Accrued Payroll $8,500
• Credit: Cash $8,500

2. Accrued contractor services work similarly.

A subcontractor completed $3,000 of work in November but will not invoice until December. To capture November's actual costs:

• Debit: Contractor Expense $3,000
• Credit: Accrued Expenses $3,000

3. Accrued interest captures borrowing costs.

If you have a $100,000 line of credit at 8% annual interest, the monthly interest accrues even if you pay quarterly:

• Debit: Interest Expense $667
• Credit: Accrued Interest $667

This adjustment ensures each month bears its fair share of interest cost rather than lumping three months into one quarter.

Prepaid expense and deferred revenue adjustments

These entries spread costs and revenue across the periods in which they actually benefit or belong.

1. Prepaid insurance is a classic example.

You pay $12,000 in January for annual business insurance. Recording the full amount as a January expense would overstate January's costs and understate the remaining eleven months' costs.

Initial payment in January:

• Debit: Prepaid Insurance $12,000

• Credit: Cash $12,000

Monthly adjusting entry (each of twelve months):

• Debit: Insurance Expense $1,000

• Credit: Prepaid Insurance $1,000

By December, Prepaid Insurance reaches zero, and each month has recognized its proper $1,000 share.

2. Prepaid rent follows the same pattern.

If you pay $15,000 covering three months of rent, spread it across those months rather than expensing it in a single payment.

3. Deferred revenue recognition handles the opposite situation: money received before you earned it.

A client pays a $24,000 annual retainer in January. You have not delivered any services yet, so this is not revenue.

Initial receipt:

• Debit: Cash $24,000

• Credit: Deferred Revenue $24,000

Monthly recognition as you deliver services:

• Debit: Deferred Revenue $2,000

• Credit: Consulting Revenue $2,000

This principle of adjusting entries is fundamental: record revenue when it is earned, not when it is received. Your January cash flow looks great, thanks to that $24,000 deposit, but your income statement correctly shows only $2,000 in January revenue from that engagement.

Depreciation and other standard adjustments

These entries capture non-cash expenses and corrections that do not arise from obvious transactions.

1. Depreciation allocates the cost of equipment and other assets over their useful life.

Your firm purchased $30,000 of computer equipment, expected to last for 5 years. Rather than expensing $30,000 when purchased, you spread the cost:

Monthly depreciation entry:

• Debit: Depreciation Expense $500

• Credit: Accumulated Depreciation $500

This $500 monthly expense appears on your income statement even though no cash was left in your account. The Accumulated Depreciation account reduces the asset's book value on your balance sheet over time.

2. Bad debt expense recognizes that some receivables may never be collected.

If historical experience suggests 2% of receivables become uncollectible, and you have $150,000 in accounts receivable:

• Debit: Bad Debt Expense $3,000

• Credit: Allowance for Doubtful Accounts $3,000

This adjustment ensures your accounts receivable balance reflects realistic collectible amounts rather than optimistic totals.

3. Bank fees and interest adjustments reconcile your books to bank statements.

The bank charged $45 in fees that have not been recorded:

• Debit: Bank Fees Expense $45

• Credit: Cash $45

4. Accrued professional fees capture services received but not yet billed.

Your attorney provided $2,500 of work this month, but bills quarterly:

• Debit: Legal Expense $2,500

• Credit: Accrued Expenses $2,500

Building your month-end adjustment checklist

Consistent monthly close requires a standardized checklist of adjusting entries. For most professional service firms, this includes:

Standard monthly adjustments:

1. Payroll accrual for work performed but not yet paid

2. Prepaid expense recognition (insurance, software, rent)

3. Deferred revenue recognition for retainers and prepaid projects

4. Depreciation on fixed assets

5. Bank reconciliation adjustments

Periodic adjustments (quarterly or annually):

1. Bad debt expense review

2. Accrued professional fees

3. Inventory adjustments, if applicable

4. Interest accruals on debt

Year-end specific adjustments:

1. Comprehensive prepaid and deferred revenue review

2. Depreciation schedule verification

3. Accrual completeness check

Your bookkeeper or accountant should have a documented process covering these adjustments each month. If you are unsure whether your books include proper adjusting entries, ask to see the adjustment journal for a recent month-end close.

Why this matters for your firm

Adjusting journal entries is not accounting busywork. They are what transform raw transaction data into accurate financial statements you can actually trust.

Without proper adjustments, your monthly profit could swing wildly depending on when bills arrive or when clients happen to pay, rather than on actual business performance. You might think December was terrible when it was actually strong, or believe January exceeded targets when it merely benefited from December's delayed entries.

For professional service firms making decisions about hiring, pricing, and growth, accurate monthly financials are not optional. They are the foundation for confident business decisions. Understanding these common adjusting entries helps you verify that your books are telling the true story each month.