Bookkeeping Basics · Edmonton
Adjusting journal entries, explained properly.
Adjusting entries turn a record of cash moving into an accurate picture of what you earned and spent. Here are the five types, one worked month, and the mistakes to avoid.
By the Plum team- Updated Oct 2026
- 9 min read
- Adjusting entries put revenue and expenses in the period they belong to.
- The five types: accrued revenue, accrued expenses, prepaid expenses, unearned revenue and depreciation (plus estimates like bad debts).
- Every adjusting entry hits one balance sheet account and one income statement account.
- None of them touch cash.
- Reverse accruals at the start of next month so nothing is counted twice.
Adjusting journal entries are the entries you make at the end of a month or year to fix timing. Day-to-day bookkeeping mostly follows cash: money in, money out. But business doesn't always line up with cash. You finish work before you invoice it, pay for insurance a year ahead, and use equipment for years after you bought it. Adjusting entries line all of that up with the period it really belongs to.
This is a teaching post, so we'll go slowly: what each type is, why it exists, the debit and credit for each, and then a full worked month with five entries that balance. If debits and credits are new, start with journal entry examples and cash vs accrual accounting.
1Why adjusting journal entries exist
Accrual accounting follows one principle: record revenue when it's earned and expenses when they're incurred, not when cash moves. That's what gives you a true monthly profit, and it's the basis CRA expects for most businesses' income.
Your bank feed can't know that the $1,200 software payment in July covers twelve months, or that you did $3,000 of work on December 30 that you'll invoice on January 5. You know it, and the adjusting entry is how you tell the books.
Every adjusting entry has the same shape: one side is a balance sheet account (an asset or liability that holds the timing difference) and the other side is an income statement account (revenue or expense). The bank never appears.
2The five types of adjusting entries
| Type | What happened | Typical entry |
|---|---|---|
| Accrued revenue | You earned it but haven't invoiced yet | Debit Accrued receivables, credit Revenue |
| Accrued expense | You owe it but haven't been billed yet | Debit Expense, credit Accrued liabilities |
| Prepaid expense | You paid in advance; now part is used up | Debit Expense, credit Prepaid asset |
| Unearned revenue | A customer paid in advance; work not done | Debit Revenue (or cash receipt), credit Unearned revenue |
| Depreciation and estimates | An asset wore down, or a receivable looks doubtful | Debit Depreciation or Bad debt expense, credit Accumulated depreciation or Allowance |
Accruals (the first two) record things that happened before the paperwork. Deferrals (the next two) push things that were paid early into the right later period. We go deeper on the middle two in accrued vs prepaid expenses and unearned revenue and customer deposits.
3A worked month: five adjusting journal entries
Say you run a small marketing agency in Edmonton with a December 31 year end. Your December books are entered and reconciled, and they show a profit of $9,000 for the month. Now the adjustments:
- Accrued revenue: you finished a $3,000 project on December 30 and will invoice it January 5.
- Accrued expense: your business loan's December interest of $175 is charged in January.
- Prepaid expense: in July you paid $1,200 for a year of software and recorded it as a prepaid asset. Nobody has expensed any of it yet, and six months (July to December) are used: $600.
- Unearned revenue: a client paid a $4,000 retainer on December 20 for a January campaign, and it was recorded as revenue.
- Depreciation: your book depreciation on equipment is $425 for the month.
| Account | Debit | Credit |
|---|---|---|
| Accrued receivables | $3,000.00 | |
| Service revenue | $3,000.00 | |
| Interest expense | $175.00 | |
| Accrued liabilities | $175.00 | |
| Software subscriptions expense | $600.00 | |
| Prepaid expenses | $600.00 | |
| Service revenue | $4,000.00 | |
| Unearned revenue | $4,000.00 | |
| Depreciation expense | $425.00 | |
| Accumulated depreciation | $425.00 | |
| Totals | $8,200.00 | $8,200.00 |
Now the effect on December's profit:
| Adjustment | Effect on profit |
|---|---|
| Profit before adjustments | $9,000 |
| Accrued revenue | + $3,000 |
| Accrued interest | − $175 |
| Software used up | − $600 |
| Retainer moved to next year | − $4,000 |
| Depreciation | − $425 |
| Adjusted profit | $6,800 |
The bank balance didn't change by a cent, but profit dropped by $2,200. Because December is year end, that's also $2,200 less taxable income this year (the depreciation will be replaced by your accountant's CCA figure for tax, but the rest flows through). It's also more honest: the $4,000 retainer is January's revenue, and January will now show it.
What changed on the balance sheet
Every adjustment had a balance sheet partner, so the balance sheet changed too. After the five entries, the agency's December 31 balance sheet shows a new $3,000 asset (accrued receivables), $600 less in prepaid expenses, $425 more accumulated depreciation, and two new liabilities: $175 of accrued interest and $4,000 of unearned revenue. Overall, assets rose by $1,975 ($3,000 minus $600 minus $425) and liabilities rose by $4,175 ($175 plus $4,000). Assets up $1,975 and liabilities up $4,175 means equity fell by $2,200, exactly the drop in profit. That's double-entry doing its job: the balance sheet still balances, and the change in equity matches the change in profit to the dollar.
Estimates: the adjustment you make with judgment
Some adjustments aren't about timing but about judgment. If a $1,800 invoice is 120 days late and the customer has gone quiet, your books are overstating what you'll really collect. Many businesses record an allowance for doubtful accounts (debit Bad debt expense, credit Allowance for doubtful accounts) rather than writing the invoice off immediately. For tax, CRA has its own rules on reserves for doubtful debts and on bad debt deductions, so your accountant will review these at year end. Our guide to bad debt write-offs in Canada covers the details.
4Reversing entries: the tidy way to handle accruals
On January 5 you'll issue the $3,000 invoice, which records revenue of $3,000. But you already recorded that revenue in December. Without a fix, it's counted twice.
The fix is a reversing entry dated January 1: debit Service revenue $3,000, credit Accrued receivables $3,000. January starts with negative $3,000 of revenue, the invoice adds $3,000, and January's net is zero for that project. December keeps it. The same applies to the $175 of accrued interest when the bank actually charges it.
Prepaids, unearned revenue and depreciation are not usually reversed. They're cleared over time as each month uses them up or the work gets done.
5Adjusting entries in QuickBooks Online
- Create the entry from + New, then Journal entry. Date it the last day of the period.
- Mark it. QuickBooks Online Accountant has an Is Adjusting Journal Entry checkbox; either way, start the memo with "ADJ" so it's easy to find in reports.
- Reverse accruals. In QuickBooks Online Accountant, a saved journal entry has a Reverse option that creates the opposite entry on the first day of the next month. Otherwise, create the reversing entry manually.
- Automate the regular ones. Prepaid insurance and monthly depreciation repeat; set them up as recurring journal entries so they post every month.
- Avoid using accounts payable or receivable in journal entries where you can. QuickBooks requires a customer or vendor on those lines and it can confuse the aging reports. Separate accrued receivables and accrued liabilities accounts keep things clean.
6Common mistakes with adjusting journal entries
- Forgetting to reverse accruals, so revenue or expenses appear in two months.
- Touching cash. If the entry involves the bank, it's a missing transaction, not an adjustment.
- Booking tax depreciation as book depreciation. CCA is calculated on the tax return. Your book depreciation can follow a sensible useful life.
- Over-adjusting small items. A $30 annual subscription doesn't need to be spread over twelve months. Set a reasonable threshold and stick to it.
- No memo. An unexplained journal entry is the first thing an accountant or CRA reviewer will ask about.
Adjusting entries checklist for each close
Adjusting entries are what turn a pile of categorised transactions into financial statements you can actually rely on, and they're part of every month-end close. If you'd rather have them done for you, Plum handles adjustments and closes for businesses in Edmonton, Sherwood Park, St. Albert and Beaumont. Book a quick call and we'll show you what your profit looks like once the timing is right.
7Questions people ask
What are adjusting journal entries?
They're entries made at the end of a period to record revenue and expenses in the period they belong to, even if cash hasn't moved yet. They cover accruals, deferrals, depreciation and estimates.
Do adjusting entries affect cash?
No. Adjusting entries never touch the bank account. They move amounts between balance sheet accounts like prepaids or accrued liabilities and income statement accounts like revenue or expenses.
When do you make adjusting entries?
At the end of each accounting period, usually monthly as part of the month-end close, and always at year end before the tax return is prepared.
What is a reversing entry?
A reversing entry is the exact opposite of an accrual, dated the first day of the next period. It stops the expense or revenue being counted twice when the real bill or invoice is recorded.
Does CRA require accrual accounting?
For most businesses, CRA expects income to be reported on the accrual basis, with exceptions such as farming and fishing. Adjusting entries are how cash-based day-to-day records become accrual-based at period end.
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Book a free 15-min callThis article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.