Why adjusting journal entry matters to a first-time founder
Adjusting journal entries put income, expenses, assets and liabilities in the period when they belong. They stop invoice dates or missing estimates from distorting the accounts. Common entries cover accrued costs, prepaid costs, depreciation, revenue received early and errors found while closing the books.
Examples of adjusting journal entry
A business pays A$12,000 for a year’s insurance on 1 October and records it as a prepaid asset. On 31 December, it records A$3,000 as an expense and reduces the asset by A$3,000. This puts the cost of the first three months in the correct period.
Common misunderstanding
An adjusting entry is not a way to hide an unexplained difference or reshape results. Each entry needs a reason, evidence and review. Some entries reverse in the next period and others stay in the accounting records, so do not reverse them automatically without understanding why they were made.
When to use it
Use adjusting entries at month, quarter or year end when routine bookkeeping has put an amount in the wrong period or missed it. Record the calculation and approval, check the affected accounts and review any reversal. Discuss large entries or those based on judgement with the responsible accountant.