Quick Fix: Post one debit to an expense account and one credit to a liability or asset account so both income statement and balance sheet are accurate before closing the books.
If your trial balance doesn’t match your financial statements, the debit portion of an adjusting entry increases an expense account to match expenses incurred with the correct period. Run adjusting entries every month-end or quarter-end in your general ledger.
What’s Happening
Every entry touches one income-statement account and one balance-sheet account. IRS Publication 538 (as of 2026) still requires accrual-basis taxpayers to make these entries; cash-basis taxpayers are generally exempt.
Why Do Adjusting Entries Matter?
Imagine paying $12,000 for a 12-month insurance policy in January. Without adjustments, your January income statement would show a $12,000 expense, even though you only used one month of coverage. (Honestly, this is where most small businesses get tripped up.) Adjusting entries spread that $1,000 monthly expense across each period—matching costs to the periods they benefit.
Step-by-Step Solution
- Open the general ledger in your accounting software (QuickBooks Desktop 2026 R13, Sage Intacct 2026.2, or NetSuite 2026.1).
- From the Company menu (QuickBooks) or Financial ➞ Adjusting Journal Entry (Sage/NetSuite), choose Make General Journal Entry.
- Enter the entry date as the last day of the reporting period (e.g., 2026-03-31 for Q1).
- In the first line, debit the applicable expense account (e.g., “Utilities Expense – March 2026”) for the exact accrual amount.
- In the second line, credit the corresponding balance-sheet account: “Utilities Payable” for accrued utilities or “Prepaid Insurance” for deferred expenses.
- Save the entry; the software will post it to both the general ledger and the trial balance.
Common Mistakes to Avoid
Some accountants treat adjusting entries like an afterthought. (Big mistake.) Always attach the original invoice, contract, or timecard that proves the expense belongs in this period. Another pitfall? Using generic account names like “Miscellaneous Expense.” Over time, that becomes a black hole for unclassified costs. Be specific—your future self (and your auditor) will thank you.
If This Didn’t Work
- Reversing entries: After closing, create a reversing entry on the first day of the next period (QuickBooks: Edit ➞ Preferences ➞ Accounting ➞ check “Use reversing journal entries”).
- Accrual vs. deferral mismatch: Re-run the Unadjusted Trial Balance report (Reports ➞ Accountant & Taxes ➞ Unadjusted Trial Balance) and compare each line to your supporting documents; adjust the debit/credit amounts accordingly.
- Software sync issue: Export the journal to a .csv, edit in Excel, then re-import using the Import Journal Entries tool in your platform’s Accountant Tools menu.
Prevention Tips
Schedule a recurring Adjusting-Entry Checklist in your calendar one week before each month-end close. Keep a running Prepaid Expense Schedule (Excel or Google Sheets) that ties every deferred-expense debit to its original invoice date and amortization schedule. Reconcile every Accrued Expense account monthly against vendor statements; FASB ASC 958-320-35 (as of 2026) still requires these reconciliations for not-for-profits and public companies.
Real-World Example: Accrued Salaries
You’d debit “Salaries Expense” for $50,000 and credit “Salaries Payable” for the same amount. This ensures your March financials show the true cost of running the business, even though cash leaves the bank in April. (Without this, your profit would look artificially high in March.)
What About Deferrals?
For instance, if you prepay $6,000 for a 6-month software license in January, you’d initially debit “Prepaid Software” (an asset). Each month, you’d make an adjusting entry to debit “Software Expense” and credit “Prepaid Software” by $1,000. That way, costs hit the income statement as you use the service.
How Often Should You Do This?
Some small operations try to get away with quarterly adjustments, but that’s risky. The longer you wait, the harder it is to piece together what actually happened. (Trust me, you don’t want to be digging through six months of receipts in December.) Set a recurring calendar reminder, and stick to it.
Tools to Simplify the Process
QuickBooks, Sage Intacct, and NetSuite all have built-in adjusting-entry templates. Some even automate recurring entries (like monthly depreciation). If you’re still using spreadsheets for this, it’s time for an upgrade. (Seriously, the time savings alone justify the cost.)
Tax Implications
Accruing $10,000 in December expenses reduces your 2026 taxable income, while deferring $10,000 in revenue pushes it to 2027. IRS Publication 538 has specific rules about timing, so don’t get creative with your entries. When in doubt, consult a tax pro.
Audit Trails Matter
Tag every adjusting entry with a memo like “Q1-2026 Accrued Payroll – Audit Trail ID AJE-20260331-042.” That way, if an auditor questions a $2,000 entry from March, you can pull up the original invoice in seconds. (Nothing frustrates auditors more than vague journal entries.)
| Account Type | Normal Balance | Adjusting Entry Effect |
|---|---|---|
| Expense | Debit ↑ | Debit increases expense to match incurred period |
| Liability | Credit ↑ | Credit increases payable for unpaid expense |
| Asset | Debit ↑ | Debit amortizes prepaid expense over time |
| Revenue | Credit ↑ | Credit recognizes earned but unbilled income |
Final Checklist Before Closing the Books
- Did you accrue all unpaid expenses (payroll, utilities, vendor invoices)?
- Did you defer all prepaid expenses (insurance, rent, subscriptions)?
- Did you reconcile all accrued liabilities against vendor statements?
- Did you tag every entry with a clear memo for audit purposes?
- Did you save a backup of your general ledger before closing?
