At a Glance
An adjusting journal entry is an entry made in a company's books of accounts at the end of a business cycle (typically at the end of the year) to recognize any unrecorded income or expense for that particular year.
Adjusting entries are made for a couple of reasons one being to correct accounting mistakes or adjusting estimates made earlier in the year.
A Simplified Example
Darius made a sale of $50,000 on December 10th, 2020. The client paid the amount on December 20th, 2020, a day he was officially closing the financial year for his real estate firm. The sale was not captured in the revenues for 2020 and his accountant had to make and adjusting journal of entry.
To effect the changes, these entries were made:
First, record the sale (sold on credit):
After receiving the payment, make an adjusting journal entry:
Accounting entries can be a little technical for those with limited accounting knowledge but most accountants and accounting systems will spare you the nitty-gritty and present you with reconciled figures.
More examples of adjusting journal entries can be found here.
How Adjusting Journal Entries help your business
Accounting methods need to comply with the rules set by international bodies for accounting standards. This is why making corrections in your business records must follow certain techniques if other stakeholders are to rely on that information. Adjusting journal entries helps your business to conform to the internationally-accepted accounting standards for making corrections after the books of accounts have been closed.
It is common for some expenses or incomes to go unrecorded at the end of the accounting period, hence the need for adjusting entries to make such corrections.