What Are Adjusting Entries Needed For?

What’s Happening

These internal journal entries aren’t optional for any business putting out financial statements. They stop revenues and expenses from landing in the wrong period. Without them, your balance sheet and income statement would lie about your company’s real financial health. The Financial Accounting Standards Board (FASB) demands these entries under GAAP to keep financial reports consistent and comparable. Small businesses often skip them—big mistake. That oversight can lead to audit headaches and wildly inaccurate financial snapshots.

Step-by-Step Solution

1. Identify Accounts Needing Adjustment Scan your unadjusted trial balance for accounts tied to prepaids (like Prepaid Rent), accruals (like Accrued Wages), estimates (like Depreciation), and deferrals (like Unearned Revenue). The IRS calls out omitting these accounts as a top source of discrepancies.
2. Enter the Adjusting Entry in Your Ledger For prepaid expenses, debit the expense account and credit the prepaid asset. For accrued revenue, debit Accounts Receivable and credit Service Revenue. Most accounting software (QuickBooks included) has tools for this—look under Company → Make General Journal Entries to post these accurately.
3. Calculate and Post Depreciation Take a $10,000 asset with a 5-year life. Straight-line depreciation works out to roughly $167 per month ($10,000 ÷ 60 months). In QuickBooks, automate this by going to Lists → Fixed Asset Item List → New → Depreciation.
4. Validate the Posting After logging all adjustments, pull a post-adjustment trial balance under Reports → Accountant & Taxes → Trial Balance. Double-check that debits match credits and that all adjusting accounts show the right balances.

If This Didn’t Work

Mismatched account codes cause more problems than you’d think—verify your Chart of Accounts IDs line up correctly. Next, cross-check subsidiary ledgers (like accounts receivable aging reports) against your general ledger to find missing entries. Finally, use your software’s closing tools—QuickBooks users can try File → Close the Books—to confirm no steps were overlooked. If errors keep popping up, bring in a CPA. Unresolved mistakes can wave red flags during audits.

Prevention Tips

Most accounting software lets you save templates for recurring adjustments like monthly depreciation or quarterly insurance amortization. Set up a monthly review of accrued liabilities and prepaid balances to catch timing issues early. The AICPA suggests writing these processes into an accounting manual—especially helpful when staff changes happen. Consistency beats scrambling every quarter.