That’s the thing about adjusting entries—they’re not flashy. No one celebrates the journal entry that records a $300 amortization. But get them wrong, and your balance sheet becomes fiction. We're far from it being just "bookkeeping detail." This is where accounting stops being clerical and starts being diagnostic.
Why adjusting entries matter more than you think
Most people assume accounting is just recording what happened. Cash in, cash out. But that’s cash basis—fine for a lemonade stand, dangerous for anything real. Accrual accounting matches revenues with the efforts that produced them, even if cash hasn’t moved. That changes everything. A contractor finishes a $120,000 job in December but won’t invoice until January. Should that revenue count in this year’s books? Of course it should—work was done. But without an accrued revenue adjustment, it won’t appear until next year. Then your December looks bleak, January looks golden, and investors scratch their heads. Worse, taxes might be misaligned. In short: adjusting entries preserve truth. And yes, that’s a strong word for bookkeeping, but I am convinced that financial integrity starts with these five.
Accrued revenues: when the work’s done but the money hasn’t arrived
How to recognize revenue that hasn’t been billed yet
You did the work. Your team completed the software integration on December 29. The client’s happy. But their procurement system is down. Invoice delayed. No cash. No record in the system. Yet—your effort was real, the value delivered. If you don’t record this, December revenue is understated by $18,500. That’s where accrued revenues fix the gap. You debit accounts receivable and credit service revenue. It’s not speculative. It’s accurate. The thing is, many small firms skip this because “the invoice will catch it next month.” But that breaks the matching principle. We’re not just tracking cash—we’re tracking performance.
Common industries where accrued revenues dominate
Consulting, legal, engineering, and digital agencies live on time and effort. A law firm logs 127 hours in the final week of the quarter. Clients aren’t billed until the 5th of next month. Without adjusting entries, those hours vanish from the books. In 2022, a mid-sized architecture firm in Portland restated three quarters because they never accrued project completions. Their reported profit? Down 38%. All from entries that should’ve taken 20 minutes a month. And that’s exactly where sloppiness becomes liability.
Accrued expenses: the bills you owe but haven’t seen
Tracking liabilities before the invoice hits your inbox
Utilities. Wages. Interest. They accrue whether you’ve been invoiced or not. Your office used electricity all December. The bill arrives January 6th. Do you record it in January? No. The expense belongs to December. Failure to adjust means expenses are understated, profit inflated. A restaurant in Austin thought they made $6,200 in December. Turned out they hadn’t accrued $3,900 in overtime wages. Their “profit” was a mirage. Because adjusting entries reflect obligations, not paperwork.
Interest and salary accruals: silent profit killers
Interest on a $250,000 loan at 6% doesn’t just hit on payment dates. It builds daily. By month-end, $1,250 might be owed but not yet recorded. Skip the adjustment? Profit overstated. And payroll—what if your pay cycle ends January 3rd, but the work was done in December? You owe it. It’s a liability. But because it’s not visible, it’s often ignored. We’re talking about precision, not pedantry. Honestly, it is unclear why more firms don’t automate these. QuickBooks can do it. Excel can do it. A sticky note can do it—just don’t skip it.
Unearned revenues: cash in hand doesn’t mean it’s yours yet
A client wires $9,000 for a six-month marketing campaign. You’re excited. Revenue, right? Not yet. That $9,000 is a liability. You haven’t earned it. You might have to refund it. So you record it as unearned revenue. Then, each month, you shift $1,500 to revenue. This is the anti-intuitive part: cash inflow doesn’t always mean profit. The problem is, startups especially hate this. “But the money’s in the bank!” Yes. But ethics—and GAAP—say you can’t claim it until earned. A SaaS company in Denver recognized all $200,000 of annual subscriptions upfront. Investors praised the growth—until churn hit and they couldn’t sustain it. Restatement followed. Reputation damaged. Because timing matters.
Think of it like a gift card. Walmart gets billions in unearned revenue every holiday season. They don’t count it as income on day one. They recognize it as services are delivered. It’s a bit like being paid to paint a house—you can’t claim the full amount when you buy the paint. Only when the job’s done.
Prepaid expenses and depreciation: spreading costs across time
When you pay early, you don’t expense everything now
You pay $12,000 for a year of insurance in January. That doesn’t mean you expense $12,000 in January. That would obliterate your profit for the month. Instead, you record it as a prepaid asset. Then, each month, $1,000 moves to insurance expense. Same with office supplies, software licenses, rent. Paying early doesn’t mean consuming early. The issue remains: many bookkeepers treat prepaids as “set it and forget it.” They never amortize them. So six months in, the asset is still $12,000—on a policy that’s half-used. That’s not accounting. That’s pretending.
Depreciation: because assets don’t last forever
A delivery van costs $42,000. It won’t last 20 years. Realistically, 7 years. $6,000 a year in depreciation. Straight-line, yes—but other methods exist. Declining balance for faster write-offs. Units of production if usage varies. The point: the van isn’t a one-time hit. Its cost spreads across its useful life. Not recording depreciation? Your profits look better. Your assets look overstated. And when the van dies in year 5, there’s no reserve. Surprise! But because depreciation is non-cash, some people think it’s optional. It’s not. It’s a reflection of wear and tear. A $1.4 million CNC machine depreciated over 10 years? That’s $11,667 a month. Ignore it, and your margins lie.
Adjusting entries vs. closing entries: don’t mix them up
Adjusting entries happen before closing. Their job: fix timing mismatches under accrual accounting. Closing entries come after. Transfer temporary accounts (revenue, expenses) to retained earnings. Different purpose. Different timing. But people confuse them. Adjusting entries ensure accuracy. Closing entries ensure readiness for the next period. One corrects, the other resets. Yet, the confusion persists—especially in small firms using single-entry methods. The problem is, if you skip adjusting entries, closing entries just lock in errors. Which explains why some financials look clean but feel wrong.
Frequently Asked Questions
Can adjusting entries affect taxes?
Yes. Accrual-based tax reporting (used by most businesses over $25 million in revenue) requires these adjustments. Record $100,000 in accrued revenue in December? That’s taxable income this year—even if you collect in January. Same with expenses. Accrue $20,000 in bonuses in December? Deductible this year. Wait until January? Deductible next year. Timing shifts tax liability. IRS pays attention. And that’s why precision isn’t optional.
Do small businesses need adjusting entries?
If you use accrual accounting, yes. If you’re on cash basis, technically no. But cash basis distorts reality. A freelancer bills $15,000 in December but gets paid in February. Cash basis shows zero income in December. That’s misleading. Many small businesses switch to accrual when seeking loans or investors. Banks want truth, not timing tricks. Data is still lacking on how many small firms misreport due to skipped adjustments—but anecdotal evidence suggests it’s widespread.
How often should adjusting entries be made?
Monthly. Every month. Waiting until year-end creates a nightmare. You’re reconstructing six months of unpaid wages, unused insurance, unrecorded revenue. Memory fails. Contracts get lost. Best practice: close the books monthly with full adjustments. Even if you’re a solopreneur. Because consistency beats correction.
The Bottom Line
Adjusting entries aren’t glamorous. They won’t win you clients. But skip them, and your financials are fiction. I find this overrated idea that “cash is king” leads people to ignore accrual adjustments. Cash is king, sure. But insight is emperor. These five—accrued revenues, accrued expenses, unearned revenues, prepaid expenses, depreciation—are the gears that make accrual accounting work. They’re not optional extras. They’re the foundation. And yes, doing them right takes discipline. But because the alternative is self-deception, discipline is cheap. We're far from perfect systems—but we can be honest systems. That’s the real point.