Quick Fix: Run adjusting entries for prepaids, accruals, and estimates before closing the books to ensure GAAP compliance and accurate financial statements.
What’s Happening
Adjusting entries are basically internal journal entries you make at period-end. Their job? To align revenue and expense recognition with accrual accounting. Think of them as the reality check your books need. Without these entries, your revenues, expenses, assets, and liabilities can look completely different from what’s actually happening in your business. (And that’s a recipe for disaster when you’re trying to understand your company’s true financial health.)
Under GAAP, these entries aren’t optional—even for small businesses. If you issue financial statements, you’ve got to do them, no exceptions.
Step-by-Step Solution
- Identify Accounts Needing Adjustment Grab your unadjusted trial balance and scan for accounts tied to prepaids, accruals, or estimates. You’re looking for things like Prepaid Insurance, Unearned Revenue, Accrued Salaries, Depreciation Expense, and Allowance for Doubtful Accounts. These are the usual suspects.
- Open Your Accounting Software Now, fire up your general ledger module. In QuickBooks Desktop 2026, you’d go to Company → Make General Journal Entries. In Xero 2026, it’s Accounting → Journal → + Add Journal. (Pro tip: Bookmark these paths so you don’t waste time hunting for them next period.)
- Enter the Adjusting Entry for Prepaid Expenses
Let’s say you bought a $1,200 six-month insurance policy in March. Each month, you’re using $200 of that coverage. Here’s how to record it:
- Debit Insurance Expense $200
- Credit Prepaid Insurance $200
- Record Accrued Revenue
Imagine you earned $500 of service revenue in December but won’t invoice until January. You still need to recognize that revenue now. Here’s the entry:
- Debit Accounts Receivable $500
- Credit Service Revenue $500
- Post Accrued Expenses
What if you paid $3,000 in December salaries on January 5? You need to record that expense in December. The entry looks like this:
- Debit Salaries Expense $3,000
- Credit Salaries Payable $3,000
- Calculate Depreciation Say you’ve got a $10,000 asset with a 5-year life and no salvage value. Straight-line depreciation means about $167 per month. In QuickBooks, you’d handle this under Lists → Fixed Asset Item List → New → Depreciation. (Honestly, this is the most straightforward part of the whole process.)
- Update Allowance for Doubtful Accounts
Let’s estimate 2% of your $25,000 accounts receivable won’t get collected. That’s $500. Record it like this:
- Debit Bad Debt Expense $500
- Credit Allowance for Doubtful Accounts $500
- Validate the Posting After you’ve posted everything, run a post-closing trial balance in Reports → Accountant & Taxes → Trial Balance. Double-check that debits equal credits and that all your adjusting accounts look correct. (This step catches more mistakes than you’d think.)
If This Didn’t Work
- Check Account Mapping Here’s a common culprit: mismatched general ledger account numbers. If your adjusting entries land in the wrong accounts, your financial statements will look way off. Fix the mapping, and the problem usually disappears.
- Reconcile Subledgers Compare your subsidiary ledgers—like accounts receivable aging or your fixed asset register—to the general ledger totals. If they don’t match, you’ve likely missed an adjustment somewhere. (This is where most discrepancies hide.)
- Review Period-End Closing Checklist Did you skip a step? Use your accounting software’s year-end closing tool—like QuickBooks’ File → Close the Books—to make sure you didn’t miss anything. These tools are there to keep you on track.
Prevention Tips
Want to save time and headaches? Automate the recurring stuff—like monthly depreciation or quarterly insurance amortization. Most accounting software lets you set up templates for adjusting entries, so you’re not reinventing the wheel every period. (Seriously, this is a game-saver for busy finance teams.)
Schedule a monthly review of accrued liabilities and prepaid balances. It’s like a mini audit that catches timing issues before they snowball. According to the IRS, consistent adjusting entry practices make audits smoother and cut down on year-end chaos. The AICPA even recommends writing your adjustment policies into an accounting manual. That way, your process stays consistent even when staff changes happen.
