Which of the Following Is Not an Adjusting Entry?
*The short version is: not every journal entry you see at month‑end is an adjusting entry. Knowing the difference can save you headaches when you close the books That's the whole idea..
Ever stared at a list of journal entries and wondered, “Wait, is this really an adjusting entry or just a regular transaction that slipped in late?”
You’re not alone. Now, in practice, the line between “adjusting” and “non‑adjusting” can get blurry, especially for students and junior accountants who are still learning the rhythm of the accounting cycle. The truth is, an adjusting entry has a very specific purpose: it makes the financial statements reflect the true economic reality for the period just closed. Anything that doesn’t meet that purpose is not an adjusting entry.
Below we’ll unpack what counts as an adjusting entry, why the distinction matters, walk through the mechanics, flag the common traps, and give you a checklist you can actually use tomorrow. By the end, you’ll be able to spot the oddball entry that doesn’t belong in the adjusting‑entry bucket—no more second‑guessing during the close.
What Is an Adjusting Entry?
Adjusting entries are the final set of journal entries you post before the financial statements are printed. They’re not about recording new cash flows or transactions that happened after the period; they’re about fine‑tuning the numbers that are already there so they obey the accrual basis of accounting.
Think of it like polishing a piece of furniture before you show it off. The underlying wood (your raw transactions) is already there; the polish (the adjusting entry) just makes sure the shine matches the room’s lighting (the reporting period) Small thing, real impact. That alone is useful..
The Core Types
- Accruals – Revenues earned or expenses incurred that haven’t been recorded yet (e.g., earned service revenue not yet billed).
- Deferrals – Cash received or paid in advance that needs to be moved from a temporary account to a permanent one (e.g., prepaid rent).
- Estimates – Bad‑debt expense, depreciation, or warranty expense that rely on judgment rather than exact amounts.
- Corrections – Errors discovered after the fact that affect the current period’s balances (e.g., mis‑posted expense).
If an entry fits one of those boxes, you’re probably looking at an adjusting entry.
Why It Matters / Why People Care
When you skip or misclassify an adjusting entry, the ripple effects are huge:
- Misstated Net Income – Overstating revenue or understating expenses inflates profit, which can mislead investors or trigger tax penalties.
- Balance Sheet Distortions – Assets and liabilities won’t line up with the period’s reality, breaking the fundamental accounting equation.
- Audit Red Flags – Auditors love to chase down “unusual” entries that don’t belong in the adjusting batch; it eats up time and can raise doubt about internal controls.
- Decision‑Making Errors – Managers rely on accurate period‑end numbers to allocate resources. A wrong entry can send a whole division down the wrong path.
In short, adjusting entries are the guardrails that keep your financial statements honest. Anything that isn’t an adjusting entry is just noise that can clutter the close process.
How It Works (or How to Do It)
Below is a step‑by‑step walk‑through of the adjusting‑entry workflow, from spotting the need to posting the final journal. Feel free to follow along with your own ledger or accounting software It's one of those things that adds up. Simple as that..
1. Review the Trial Balance
Start with a clean trial balance at the end of the period. Look for:
- Zero‑balance temporary accounts that should have activity (e.g., “Supplies Expense” with a zero balance but you know you used supplies).
- Unusual balances in asset or liability accounts (e.g., “Prepaid Insurance” still showing a full year’s worth after six months).
2. Identify Accrual Opportunities
Ask yourself: Did we earn revenue or incur expense that hasn’t been recorded? Common accruals include:
- Accrued Salaries – Employees worked but haven’t been paid yet.
- Interest Income – Earned on a note receivable but not yet received.
- Utilities Payable – Bill arrives after month‑end.
If the answer is “yes,” you’ll need an adjusting entry that debits an expense (or asset) and credits a liability (or revenue) Most people skip this — try not to..
3. Spot Deferrals
Deferrals are the flip side: cash moved in advance that must be recognized over time. Look for:
- Prepaid Rent – Paid for the next six months; each month you move a portion to “Rent Expense.”
- Unearned Revenue – Customer paid for a service you’ll deliver later; you recognize revenue as you fulfill it.
The entry will debit a liability (or expense) and credit an asset (or revenue) as the period progresses That's the part that actually makes a difference. Took long enough..
4. Estimate Where Judgment Is Needed
Estimates are the trickiest because they involve assumptions:
- Depreciation – Allocate the cost of a fixed asset over its useful life.
- Bad‑Debt Expense – Estimate the portion of accounts receivable that won’t be collected.
- Warranty Liability – Predict future warranty costs based on sales.
You’ll typically debit an expense and credit a contra‑asset or liability (e.Day to day, g. , “Accumulated Depreciation” or “Allowance for Doubtful Accounts”) Easy to understand, harder to ignore..
5. Make Corrections
If you discover an error that affects the current period, you correct it with an adjusting entry rather than a regular entry. Example:
- You accidentally recorded a $2,000 office supply purchase as an expense in March, but the invoice shows it should have been capitalized as an asset. The adjusting entry moves the amount from “Supplies Expense” to “Office Equipment.”
6. Post the Adjusting Entry
In most modern ERP systems, you’ll have a dedicated “Adjusting Entry” screen that forces you to select the period and tag the entry as “adjusting.” This helps auditors filter them later.
7. Run the Adjusted Trial Balance
After posting, run a new trial balance. All temporary accounts (revenues, expenses, dividends) should now reflect the correct period amounts, ready for the income statement and statement of retained earnings.
8. Close the Books
Finally, close temporary accounts to retained earnings (or capital). This step is not an adjusting entry—it’s a closing entry, which is a different beast altogether Worth knowing..
Common Mistakes / What Most People Get Wrong
Even seasoned accountants slip up. Here are the pitfalls you’ll see most often, plus a quick fix for each.
| Mistake | Why It’s Wrong | Quick Fix |
|---|---|---|
| Treating a regular transaction as an adjusting entry | Adjusting entries should only adjust existing balances, not record new cash flows. Worth adding: | Verify the transaction date. If it occurred during the period, it’s a regular entry. And |
| Missing the “deferral” step | Forgetting to move prepaid amounts to expense each month leaves assets overstated. Now, | Set up a recurring adjusting entry for each prepaid asset. |
| Using the wrong account type | Crediting “Revenue” for a prepaid expense creates a phantom income. Day to day, | Double‑check the account classification in the chart of accounts. |
| Over‑estimating depreciation | Too aggressive depreciation understates assets and overstates expense. | Use the straight‑line method unless the asset’s usage pattern justifies an accelerated method. |
| Skipping the adjustment for accrued expenses | Leaves liabilities understated and net income inflated. | Review all unpaid invoices and accrual schedules before the close. |
The biggest red flag is an entry that doesn’t affect a temporary account (revenue, expense, or dividend). If it only moves money between two permanent accounts (like cash and accounts payable), you’re looking at a regular or correcting entry—not an adjusting entry.
Practical Tips / What Actually Works
-
Create a “Adjusting‑Entry Checklist”
- Accruals?
- Deferrals?
- Estimates?
- Corrections?
Tick each box before you hit “Close Period.”
-
Use a “Month‑End Calendar”
Schedule specific dates for common adjustments (e.g., the 25th for prepaid rent, the 28th for accrued salaries). Consistency beats last‑minute scrambling Most people skip this — try not to.. -
put to work Software Automation
Most ERP systems let you set up recurring adjusting entries. Set them up once, review annually, and let the system do the heavy lifting Small thing, real impact.. -
Document Your Assumptions
For estimates, write a one‑sentence note: “Assumed 2% uncollectible based on historical trends.” Auditors love that transparency. -
Run a “What‑If” Report
Before posting, generate a trial balance with the adjustments simulated. Spot any odd numbers before they become permanent Turns out it matters.. -
Separate Closing from Adjusting
Keep a clear audit trail: adjusting entries get a “type = adjusting” flag, closing entries get “type = closing.” This prevents the classic mix‑up where a closing entry is mistakenly labeled as adjusting.
FAQ
Q: Can an adjusting entry be posted after the financial statements are issued?
A: Technically you can, but it would require restating the statements. The goal is to finish all adjustments before the statements are released.
Q: Are adjusting entries always made at the end of the month?
A: Not necessarily. Some companies do them quarterly or annually, depending on the reporting frequency. The key is that they happen before the period’s financials are finalized.
Q: How do I know if an entry is a “correction” or an “adjusting” entry?
A: If the error affects the current period’s balances, treat it as an adjusting entry. If it belongs to a prior period, you may need a prior‑period adjustment or a restatement instead.
Q: Do adjusting entries affect cash flow statements?
A: Indirect cash flow statements start with net income (already adjusted). Still, the underlying adjustments (like depreciation) are added back because they’re non‑cash. So yes, they indirectly shape the cash flow.
Q: What’s the difference between “accrued expense” and “accrued liability”?
A: They’re essentially the same thing; “accrued expense” emphasizes the expense side, while “accrued liability” highlights the balance‑sheet side. Both result in a debit to expense and a credit to a liability Easy to understand, harder to ignore..
So, which of the following is not an adjusting entry? Anything that doesn’t fit the four adjusting‑entry families—accruals, deferrals, estimates, or corrections—doesn’t belong. A regular cash sale recorded after month‑end, a routine bank deposit, or a simple transfer between two permanent accounts is not an adjusting entry. Spotting that misfit saves you from a cascade of reporting errors and keeps your close clean Not complicated — just consistent..
Got a list of journal entries you’re not sure about? Run them through the checklist above, and you’ll quickly see which one is the oddball that doesn’t belong in the adjusting‑entry pile. Happy closing!
7. Document the Rationale Right Where It Lives
When you create an adjusting entry in the ERP, use the comment field to capture the “why.” A good comment reads like a mini‑audit‑trail:
Adj‑2024‑03‑31 – Accrued utilities expense $12,450.
Reason: Meter reading for March received 4/2; expense incurred in March per lease.
Assumed 2% uncollectible based on historical trends.
That one‑sentence note (“Assumed 2% uncollectible based on historical trends.”) satisfies auditors who love transparency, and it saves you from hunting down the original email chain months later.
8. make use of Automation, but Keep a Human Check
Many modern accounting platforms let you schedule recurring adjusting entries (e.Now, g. , monthly depreciation, prepaid rent amortization) Worth knowing..
- Run a “dry‑run” at least once per quarter.
- Review the generated journal against the supporting schedule.
- Approve only after confirming that the underlying assumptions haven’t drifted (e.g., a change in lease terms).
Automation reduces manual errors, yet the human review catches policy changes that the system can’t anticipate.
9. Use a “Pre‑Close” Dashboard
Build a simple dashboard that surfaces any of the following red flags before you hit the “Close” button:
| Indicator | Threshold | Action |
|---|---|---|
| Unposted accruals | > 5% of total expenses | Investigate missing entries |
| Zero‑balance temporary accounts | Any | Verify that closing entries posted |
| Reversals still open after 2 days | Any | Ensure reversal logic is correct |
| Variance > 3% vs. prior period for key accounts | Any | Drill down for potential mis‑classifications |
Counterintuitive, but true.
A visual cue—like a red traffic light—makes it impossible to overlook a lingering adjustment Worth keeping that in mind..
10. Perform a “Reverse‑Entry Test”
For every adjusting entry that will be reversed in the next period (e.g., accrued salaries), run a quick reverse‑entry test:
- Duplicate the entry with opposite debits/credits.
- Post it to a sandbox environment.
- Run the trial balance; the two entries should net to zero.
If they don’t, you’ve likely mistyped an account number or amount—a problem that would otherwise surface only when the reversal fails to clear the original accrual.
11. Close the Loop with a Post‑Close Review
After the books are closed, schedule a post‑close review meeting (usually 48‑72 hours later). The agenda should include:
- Confirmation that all adjusting entries have the correct “type = adjusting” flag.
- Verification that no closing entry was mistakenly flagged as adjusting (and vice‑versa).
- A quick check of the audit trail for any entries that required manual overrides.
Document any findings and, if necessary, create an action item for the next close cycle. This continuous‑improvement loop reduces repeat issues and demonstrates to auditors that you have a solid control environment.
Bringing It All Together
Adjusting entries are the invisible glue that holds the financial statements together. They see to it that revenues, expenses, assets, and liabilities reflect the true economic activity of the period. By:
- Classifying entries correctly (accrual, deferral, estimate, correction).
- Tagging them with clear metadata (type flag, comment, source document).
- Running pre‑close simulations and “what‑if” reports.
- Separating adjusting from closing to preserve audit trails.
- Documenting assumptions—e.g., “Assumed 2% uncollectible based on historical trends.”
- Leveraging automation with human oversight.
- Monitoring a pre‑close dashboard for red flags.
- Testing reversals before they hit production.
- Conducting a post‑close review to catch any stray entries.
…you create a repeatable, auditable, and efficient close process. The result isn’t just cleaner books; it’s confidence that the numbers you present to stakeholders are both accurate and defensible It's one of those things that adds up..
Conclusion
In the world of accounting, the smallest mis‑posted adjusting entry can cascade into a material misstatement. By treating adjusting entries as a distinct, well‑documented, and rigorously reviewed component of the close, you protect the integrity of the financial statements and satisfy the auditors’ appetite for transparency. Even so, implement the checklist, embed the controls, and let the close become a predictable, low‑stress part of your monthly rhythm—rather than a dreaded scramble. Happy closing!
12. apply Version‑Control‑Style Practices for Adjusting Entries
If your ERP or accounting platform supports it, treat adjusting entries the same way developers treat code changes:
| Feature | How It Helps With Adjusting Entries |
|---|---|
| Branching/Workspaces | Create a “pre‑close” workspace where all adjusting entries are entered. On the flip side, g. That's why |
| Commit Messages | Require a mandatory comment field that follows a template (e. , ACC‑2024‑Q2‑Adj‑001 – Accrued utilities expense – 12/31/2024 – $8,432). And |
| Pull‑Request‑Style Review | Before merging the workspace into production, assign at least one peer reviewer (often a senior accountant) to approve the changes. This makes it easy to search, filter, and audit later. The main ledger remains untouched until the workspace is merged, giving you a safety net if something goes wrong. The reviewer checks the supporting documentation, the calculation logic, and the flag settings. |
| Rollback Capability | If a post‑close audit discovers an error, you can revert the entire batch of adjusting entries with a single “undo” operation rather than hunting down each line item. |
Even if your system doesn’t have native version‑control, you can simulate it with a combination of temporary tables, change‑log tables, and SQL scripts that insert, update, or delete adjusting entries in a single transaction. The key is to have a single point of truth that can be audited and, if needed, rolled back in one step.
Easier said than done, but still worth knowing.
13. Integrate Adjusting‑Entry Controls Into the External Audit Plan
External auditors often request evidence that you have a disciplined process for adjusting entries. To make their job easier—and to reduce audit‑related punch‑list items—consider the following:
- Provide a Control Matrix that maps each adjusting‑entry type (accrual, deferral, estimate, correction) to the specific control activity (e.g., “Pre‑close simulation” or “Peer review”).
- Supply the Adjusting‑Entry Log as a separate Excel/CSV export that includes: entry ID, date, account, amount, source document reference, preparer, reviewer, and status flag.
- Demonstrate Automated Tests by sharing screenshots (or a read‑only dashboard view) of the “Adjusting‑Entry Health Check” that runs nightly.
- Show Reversal Evidence for any entries that required a post‑close correction—include both the original entry and its reversal transaction.
When auditors can see a well‑documented, automated, and reviewed trail, they’ll typically issue a clean opinion on the adjusting‑entry controls, saving you time and money Most people skip this — try not to..
14. Future‑Proofing: AI‑Assisted Adjusting‑Entry Suggestions
The next wave of ERP intelligence is already arriving in the form of machine‑learning‑driven suggestions. Here’s how you can start experimenting without over‑engineering:
| AI Capability | Practical Use Case | Implementation Tip |
|---|---|---|
| Pattern Recognition | The system flags accounts that consistently show a $X variance at month‑end (e. | |
| Natural‑Language Documentation | An accountant types “Accrue 2024 Q2 bonus expense” and the AI auto‑populates the comment field, selects the correct expense account, and adds the appropriate supporting document link. | Review the AI‑generated entry in a sandbox, then approve or adjust the amount before posting. Even so, |
| Predictive Accruals | Based on historical trends, the AI proposes an accrual for warranty liability before the actual claim data is received. , “Rent expense always 2‑3 % higher than contract amount”). Still, | Enable the “Anomaly Detector” module and set a tolerance of 5 % for high‑risk accounts. But g. |
Adopting these tools incrementally lets you reap efficiency gains while preserving the governance framework you’ve built Not complicated — just consistent. Still holds up..
15. Checklist Recap – The “Adjusting‑Entry Playbook”
| # | Action | Owner | Frequency |
|---|---|---|---|
| 1 | Identify all adjusting‑entry candidates (accruals, deferrals, estimates, corrections). In real terms, | Accounting Manager | Monthly |
| 2 | Attach supporting documentation and a clear comment to each entry. Worth adding: | Senior Accountant | 48 hrs before close |
| 5 | Conduct peer review (pull‑request style). | System / Preparer | Immediate |
| 4 | Run the pre‑close simulation and review the “Adjusting‑Entry Health Check” dashboard. | Preparer | As entered |
| 3 | Tag each entry with the “adjusting” flag and appropriate sub‑type. | Reviewer | Before merge |
| 6 | Post‑close, verify that all adjusting entries have been reversed (if required) and that no closing entry carries the adjusting flag. Here's the thing — | Close Controller | Within 24 hrs after close |
| 7 | Document any deviations and create action items for the next cycle. | Close Manager | Post‑close meeting |
| 8 | Export the Adjusting‑Entry Log for audit and retain for 7 years. |
Having this playbook as a living document—stored in your shared knowledge base and updated after each close—ensures that new hires, temporary staff, or external consultants can instantly pick up the correct process Which is the point..
Closing Thoughts
Adjusting entries may seem like a series of small, technical steps, but they are the linchpin that keeps a company’s financial story honest. By systematizing classification, embedding strong metadata, automating validation, and instituting rigorous review loops, you transform a traditionally error‑prone chore into a transparent, auditable, and repeatable process.
Most guides skip this. Don't.
When the next month‑end approaches, you’ll no longer dread the “adjusting‑entry avalanche.” Instead, you’ll have a clear, documented pathway that guides each entry from inception to reversal (or permanent posting) with confidence. The result is not just cleaner books—it’s a stronger internal control environment, happier auditors, and stakeholders who can rely on the numbers you present.
So, take the checklist, adopt the controls, and let the adjusting entries work for you—not against you. Your future close cycles will be smoother, faster, and far less stressful—exactly the outcome every finance team strives for.
