What is an adjusting journal entry?

A design studio pays its insurance for the whole year in January. If you book that bill as a cost in one go, January looks very expensive and the rest of the year cheap. To spread the figures fairly, you make a booking of your own that takes a share as cost each month. That booking has no invoice or statement behind it. In Dutch bookkeeping it is called a memoriaal.

An adjusting entry is therefore an ordinary journal entry, but the trigger comes from your own administration rather than from outside. Typical examples are the monthly depreciation of an asset, moving prepaid costs to later periods, setting up a provision and putting right a wrong booking.

What goes wrong? Because there is no outside document, an adjusting entry is easy to forget, or hard to understand later. Amounts cannot be traced back when someone investigates, or the same correction is made twice. Done carelessly, it leaves you with a general ledger that nobody can explain.

Watch three things. State in the description why you are making the booking, and keep the calculation behind it, for example in a simple schedule. Set up recurring entries on a fixed timetable, so they do not depend on who happens to remember. And agree the approach with your accountant, especially around the month-end close, because they will want to review them.

Used well, an adjusting entry makes your figures more reliable. Used as an escape route for anything that does not fit, it does the opposite.