7 Adjusting Entries Examples for Clean Books in 2026
- Jun 14
- 12 min read
Your books look finished. Every invoice is entered, bank activity is reconciled, and payroll cleared. Then you open the profit and loss statement and something feels off. Revenue looks light even though the team finished work before month-end, or expenses look too low because key bills haven't landed yet.
That gap is where adjusting entries matter. Adjusting entries are a core part of accrual accounting and are usually posted at the end of a reporting period, most often monthly, quarterly, or annually, so revenue is recognized when earned and expenses when incurred rather than when cash moves, as explained in Ramp's guide to adjusting journal entries. They're what turn transaction data into financial statements you can trust.
If you've been searching for adjusting entries examples that help you close the month, this guide is built for that. Each example includes a practical scenario, a sample journal entry, the effect on your financial statements, and a simple way to handle it in QuickBooks Online and Xero.
Table of Contents
1. Accrued Expenses - When this shows up in real life - How to record it in QuickBooks Online and Xero
1. Accrued Expenses
Accrued expenses fix one of the most common month-end problems. You used the service this month, but the invoice hasn't arrived yet. If you wait for the bill, the month looks more profitable than it really was.
A small business sees this with payroll taxes, utilities, software usage fees, contractor costs, and rent-related charges. The clean entry is usually straightforward: debit the related expense account and credit an accrued liability.
When this shows up in real life
A practical example is accrued wages. If employees earned $8,500 in the final week of April but payroll runs in May, the month-end adjustment is a debit to Salary Expense and a credit to Salaries Payable for $8,500, as described in this accrued salaries example from Bob's Bookkeepers. That entry captures the expense in April instead of pushing it into May.
On the financial statements, the profit and loss statement shows the expense in the right month. The balance sheet shows the unpaid obligation. That matters because every adjusting entry affects both statements, with at least one balance sheet account and one income statement account involved, as noted earlier in Ramp's explanation.
Practical rule: If the service was received before month-end, don't wait for the vendor to tell you about it.
If you're comparing accrual books with tax or owner reporting on a cash basis, this is also where confusion starts. Bookkeepers often need a clean accrual close first, then separate cash-basis reporting. Book Tech's guide to converting from accrual to cash accounting is useful when you need to understand that difference.
How to record it in QuickBooks Online and Xero
In QuickBooks Online, post a journal entry dated the last day of the month. Use an expense account for the debit and an accrued liabilities account for the credit. If the amount repeats, set a recurring journal entry and reverse it at the start of the next month.
In Xero, the same logic applies. Create a manual journal at period-end, then post a reversal in the following period. What works well is keeping a short accrual schedule outside the software so you can true up the estimate when the actual vendor bill arrives.
2. Accrued Revenue
This is the mirror image of an accrued expense. You finished the work, but you haven't billed or collected yet. If you skip the entry, revenue is understated and the month doesn't reflect what your team delivered.
Consulting firms, marketing agencies, law firms, field service businesses, and healthcare practices run into this constantly. The work is complete, but invoicing follows an approval step, milestone review, or insurance submission.
A simple scenario and entry
One clean example comes from a consulting firm. An $8,000 December service fee is recorded as an adjusting entry in December even though payment arrives in January, according to HighRadius's accrued revenue example. The entry is a debit to Accounts Receivable and a credit to Revenue.
That single move keeps the income statement aligned with the work performed. It also keeps the balance sheet honest by showing that a customer owes you money.
If you're trying to improve this area operationally, billing speed matters just as much as the journal entry. Many owners treat this as only an accounting issue, but it's also an A/R workflow issue. A better invoicing cadence and tighter follow-up reduce how much accrued revenue sits on the books. Book Tech's overview of accounts payable and accounts receivable is a helpful reference if that process is still loose.
Revenue earned but not billed is still revenue. Cash timing doesn't change the work already delivered.
How to handle it in your software
In QuickBooks Online, post a journal entry at month-end to debit Accounts Receivable and credit the correct income account. When you create the actual invoice next month, make sure you clear the accrual cleanly so you don't count the same revenue twice.
In Xero, use a manual journal if the invoice isn't ready before closing. Then either reverse the journal when the invoice is issued or tie your close checklist to draft invoices so the handoff is controlled. What doesn't work is letting project managers decide informally whether work is “close enough” to earned. You need a clear rule for completion.
3. Depreciation Expense
Depreciation is one of the easiest adjusting entries to ignore because no cash leaves the bank at month-end. But your equipment, furniture, vehicles, leasehold improvements, and systems are still being used to produce revenue. If you expense everything only when purchased, one month gets hit too hard and later months look artificially strong.
Small businesses feel this most with work trucks, laptops, warehouse gear, clinic equipment, and store fixtures. The adjusting entry usually debits depreciation expense and credits accumulated depreciation.
Why owners miss this one
The mistake isn't usually the journal entry. It's the missing fixed asset schedule behind it. If you don't know what you bought, when you placed it in service, and whether it's still in use, the monthly depreciation entry turns into guesswork.
A real estate investor, for example, might track appliances and property improvements separately from routine repairs. That distinction affects how the books reflect ongoing operations. If you manage rentals or property entities, Book Tech's page on real estate bookkeeping services shows the kind of recordkeeping that keeps those decisions clean.
Here's a sample format for the entry:
Debit depreciation expense: Recognize the current period's share of asset cost.
Credit accumulated depreciation: Reduce the net book value of the asset on the balance sheet.
Review disposals: Remove assets that were sold, scrapped, or no longer used.
Software workflow that works
QuickBooks Online can handle the journal entry, but many teams maintain the detailed fixed asset schedule outside the system and only post the monthly total into the books. That's often the safest route for small businesses. It keeps the ledger clean while preserving detail for tax and advisory review.
Xero's fixed asset tools can be helpful if you want the subledger inside the platform. Even then, the process still depends on disciplined setup. What works is assigning each asset to a category and reviewing changes regularly. What doesn't work is posting one annual depreciation entry after year-end and expecting monthly financials to tell a useful story.
4. Prepaid Expenses
Prepaids are the opposite timing problem. You paid cash up front, but the benefit stretches into future periods. If you expense the full payment on day one, the current month is overstated and later months are understated.
Insurance, annual software contracts, business licenses, retainers, and rent deposits are common examples. These items start on the balance sheet as assets, then move to expense over time.
A common prepaid example
Accounting instruction has long used prepaid insurance as a standard adjusting entry example. A business pays an annual premium, recognizes only the portion used in the current year, and leaves the unused amount on the balance sheet as prepaid insurance, as explained in AccountingCoach's overview of adjusting entries. That's the core principle behind every prepaid schedule.
A basic journal flow looks like this:
At payment date: Debit Prepaid Expense and credit Cash.
At month-end: Debit the related expense account and credit Prepaid Expense.
At review time: Confirm the remaining prepaid balance still matches the unused benefit.
This entry has a practical cash flow benefit too. It separates “we paid for it” from “we used it.” Owners need both views, especially when planning renewals or tracking margins by month.
QuickBooks Online and Xero steps
In QuickBooks Online, record the initial payment to a prepaid asset account instead of expensing it immediately. Then post a monthly journal entry to move the used portion into expense. If the amount is standard, recurring journals can save time.
In Xero, the workflow is similar. Create the prepaid asset first, then amortize it monthly with a manual journal. What works best is a simple schedule that lists vendor, service period, start date, and end date. What fails is burying annual payments inside a generic operating expense account and trying to fix everything at year-end.
5. Unearned Revenue
When a customer pays you before you deliver the product or service, that payment isn't revenue yet. It's a liability. You still owe the customer something.
This shows up with deposits, annual retainers, prepaid service plans, subscription contracts, event fees, and pre-orders. Owners often like seeing the cash hit the bank, but the books need discipline here or income gets overstated fast.
What the entry looks like
The standard treatment is simple. When cash comes in first, credit unearned revenue instead of income. Then, as you deliver the service or ship the product, debit unearned revenue and credit revenue.
This is one of the most useful adjusting entries examples for service businesses because it forces you to define what “earned” means. For a consultant, it may be a completed milestone. For a subscription business, it may be the monthly service period. For an e-commerce seller taking pre-orders, it may be shipment date.
Bookkeepers who handle this well keep a deferred revenue schedule by customer or contract. That makes the profit and loss statement more reliable and helps owners read monthly trends correctly. If you want a clearer view of how revenue recognition affects reporting, Book Tech's explainer on what a profit and loss statement shows gives useful context.
Cash in the bank doesn't always mean revenue on the income statement.
Software tips for clean tracking
In QuickBooks Online, map deposits to an unearned revenue liability account when the service hasn't been delivered. Then post periodic adjustments into income as obligations are satisfied. Classes, locations, or customer tags can help if you manage many contracts.
In Xero, use a current liability account for deferred income and recognize revenue through scheduled journals or controlled monthly entries. What works is tying recognition to a contract schedule. What doesn't work is booking all advance payments to sales and hoping you'll remember to correct them later.
6. Inventory Adjustment
Inventory errors hit both the balance sheet and cost of goods sold. That's why they can distort gross margin so quickly. Even businesses with strong sales systems still need inventory adjustments for shrinkage, damage, spoilage, obsolete items, and counting mistakes.
Retail stores, wholesalers, food businesses, and e-commerce brands all deal with this differently. A perpetual system gives you ongoing records, but it still needs physical verification. A periodic system relies more heavily on the count itself.
Where inventory gets messy
The usual scenario is simple. Your books show one quantity, your shelf count shows another. If you don't post the difference, inventory stays misstated and your gross profit is off.
A practical month-end or quarter-end entry often debits inventory shrinkage, loss, or cost of goods sold and credits inventory. In some cases, the direction flips if the physical count is higher than recorded. The right account depends on your chart of accounts and reporting preference, but the goal is always the same: make the books match reality.
If your COGS process is still muddy, Book Tech's guide on how to journalize cost of goods sold is worth reviewing before you build inventory adjustments on top of it.
The count is the control. The journal entry is only the correction.
This walkthrough can help if your team needs a refresher on the count-to-entry workflow.
How to post the adjustment cleanly
In QuickBooks Online, post inventory adjustments carefully and make sure the quantity correction aligns with the accounting impact. If you use an integrated commerce tool such as Shopify or Cin7, check whether the operational correction already pushed an accounting sync before posting a manual adjustment.
In Xero, many businesses rely on an inventory app or external stock system, then post summary corrections into the ledger. What works is documenting why the variance happened. Theft, breakage, receiving error, duplicate SKU setup, and data entry problems need different follow-up. What doesn't work is posting a plug entry every month with no investigation.
7. Allowance for Doubtful Accounts
If you sell on credit, some receivables won't convert to cash on time, and some won't convert at all. Waiting until a specific invoice is clearly uncollectible makes your earlier financial statements look stronger than they should. The allowance method fixes that by estimating expected losses before the final write-off.
This is one of the most judgment-heavy adjusting entries examples. There usually isn't one perfect number. There does need to be a consistent method.
A practical way to think about it
A service firm might review aging by customer, flag slow-paying accounts, and increase bad debt expense when risk rises. A healthcare practice might look closely at older insurance balances. A contractor may focus on disputed invoices near project closeout.
The sample journal entry is typically debit Bad Debt Expense and credit Allowance for Doubtful Accounts. The expense hits the income statement. The allowance reduces net accounts receivable on the balance sheet without removing the original invoice from A/R yet.
That's the trade-off owners need to understand. A conservative allowance can make current profit look lower, but it gives a cleaner picture of collectible receivables. An overly optimistic allowance flatters the month and creates a cleanup problem later.
System setup that helps
In QuickBooks Online, create a separate allowance account under accounts receivable-related balances and use journal entries to adjust it monthly or quarterly. Then review the aging report alongside customer notes before changing the estimate. The software won't replace judgment here.
In Xero, use the same structure. Keep the allowance separate from direct write-offs so you can see both expected credit loss and actual removals. What works is applying the same policy every close. What doesn't work is adjusting the allowance only when year-end taxes are due or when a lender asks for statements.
7-Point Comparison of Adjusting Entries
Adjusting Entry | 🔄 Implementation Complexity | ⚡ Resource Requirements | 📊 Expected Outcomes | ⭐ Ideal Use Cases | 💡 Key Advantages |
|---|---|---|---|---|---|
Accrued Expenses (Accruals for Unpaid Bills) | Moderate, requires periodic estimates and reversals | Bookkeeping time; vendor/payment schedule review; automation reduces load | Liabilities recognized; smoother monthly P&L | Businesses with delayed invoicing or recurring bills | Prevents volatility; aids cash forecasting and tax compliance |
Accrued Revenue (Income Earned But Not Yet Received) | Moderate, needs tracking of completion vs. billing dates | A/R tracking; project/completion records; invoicing discipline | Revenue matched to delivery period; higher A/R | Service, consulting, contracting, healthcare providers | Reflects true performance; improves lending/investor reporting |
Depreciation Expense (Fixed Asset Allocation) | High, requires fixed-asset register and method selection | Fixed-asset system or schedules; periodic reviews; tax coordination | Asset values amortized; tax deductions; steady expense recognition | Capital-intensive businesses (construction, real estate, medical) | Improves asset valuation and tax planning; informs capex decisions |
Prepaid Expenses (Capitalization and Amortization) | Low–Moderate, schedule and monthly amortization needed | Prepaid schedule; simple amortization setup in software | Smoothes expense recognition; separates cash flow from expense | Subscription-heavy, SaaS-adjacent, businesses with annual prepayments | Prevents distorted monthly P&L; simplifies year-end reporting |
Unearned Revenue (Deferred Income) | Moderate, needs delivery/milestone tracking and revenue release | Contract management; deferred revenue schedule; automation helpful | Cash received shown as liability until earned; accurate revenue timing | Subscriptions, SaaS, pre-orders, retainers | Protects revenue accuracy; clarifies fulfillment obligations |
Inventory Adjustment (Periodic vs. Perpetual Systems) | High, physical counts, reconciliation, and variance analysis | Physical count labor or cycle counting tools; inventory software | Accurate COGS and inventory valuation; shrinkage identified | Retail, e-commerce, wholesale, food service | Improves margins, purchasing decisions, and audit readiness |
Allowance for Doubtful Accounts (Bad Debt Expense) | Moderate, requires estimation policy and aging analysis | A/R aging reports; credit risk assessment; periodic reviews | Net A/R conservative; bad debt matched to sales period | Credit-extending businesses and professional services | GAAP-compliant A/R valuation; reduces unexpected write-offs |
From Adjustments to Actionable Insights
A service business can look profitable on paper and still have a weak month. The usual reason is timing. Bills sit unrecorded, revenue is earned before invoicing goes out, or a prepaid annual software bill is still sitting in expenses instead of being spread across the year. Adjusting entries correct those timing problems so the financial statements reflect the work, costs, and obligations of the period you are reviewing.
That shift changes how an owner reads the numbers.
If expenses are missing, margins look better than they are. If earned revenue is waiting on invoicing, sales appear soft even when the team delivered. If prepaids, deferred revenue, inventory, or doubtful accounts are misstated, hiring plans, pricing decisions, and cash forecasts can all head in the wrong direction.
The practical fix is a repeatable close process. Small businesses rarely need complicated accounting treatment every month. They need a checklist, consistent cutoff rules, and someone who knows where misstatements usually show up first. In practice, that means reviewing payroll accruals, unbilled work, prepaid schedules, depreciation, inventory variances, and aging receivables before reports go out.
Software helps, but it does not make the judgment calls for you. QuickBooks Online and Xero can post recurring journals, store schedules, and speed up reporting. They still rely on accurate decisions about what was earned, what was incurred, and what is still collectible. That is why each adjusting entry in this guide included more than a definition. You need the scenario, the sample journal entry, the financial statement impact, and the steps to record it correctly in QuickBooks Online or Xero.
Good adjusting entries produce books you can use. The income statement becomes more reliable. The balance sheet becomes easier to defend. Your CPA gets cleaner records, your lender sees more credible reporting, and you can spot problems before they turn into quarter-end surprises. For small businesses that need timely reporting, this is significant because adjusting entries directly affect both the income statement and balance sheet and help preserve accurate, tax-ready records, as noted earlier.
If month-end still feels rushed or inconsistent, the problem is usually the workflow. Better closing routines lead to faster reviews, fewer corrections, and reports you can trust. Book Tech LLC helps small businesses build that process with tax-ready financials, a 7–10 day close, and direct support for QuickBooks Online and Xero.
