Adjusting Entries Explained: The 5 Types, With Examples

• 1Accrued expenses. You've incurred a cost but haven't paid or recorded it yet — a common one is a utility bill or payroll that spans the period boundary. Say your bookkeeper worked the last week of March but won't be paid until April 5th: $800 of wages were incurred in March. Debit Wages Expense $800, credit Wages Payable $800, so March's expenses reflect March's real cost.
• 2Accrued revenue. You've earned revenue but haven't billed or collected it yet. You finish a $2,400 consulting project on March 28th but don't send the invoice until April 2nd. Debit Accounts Receivable $2,400, credit Revenue $2,400 — so March gets credit for work actually done in March.
• 3Deferred (prepaid) expenses. You paid cash before using the thing you paid for. You pay $6,000 in January for six months of insurance. Each month, you debit Insurance Expense $1,000 and credit Prepaid Insurance $1,000 — recognizing one month's worth of the expense at a time instead of all $6,000 upfront.
• 4Deferred (unearned) revenue. You collected cash before delivering the service. A client pays you $3,600 upfront for a year of bookkeeping. Each month, you debit Unearned Revenue $300 and credit Revenue $300 — recognizing the revenue as you actually do the work, not the day the check cleared.
• 5Depreciation. A fixed asset — a laptop, a vehicle, equipment — loses value over its useful life, and that loss gets recorded gradually instead of all at once. A $12,000 piece of equipment with a 5-year useful life and no salvage value depreciates $200/month (using straight-line depreciation: $12,000 ÷ 60 months). Debit Depreciation Expense $200, credit Accumulated Depreciation $200.

Why depreciation gets its own contra-account

Depreciation doesn't credit the asset account directly. It credits Accumulated Depreciation, a contra-asset account that nets against the original cost on your balance sheet. That way you can always see both what the equipment originally cost and how much value it's lost — instead of just watching the asset balance shrink with no explanation.

• Any prepaid expense account (insurance, rent, subscriptions) with a balance that hasn't been reduced this period
• Any unearned revenue account where some of the work has since been delivered
• Payroll or utility costs incurred near period-end but not yet billed or paid
• Completed work that hasn't been invoiced yet
• Fixed assets on the books with no depreciation posted this period

• Recording the full prepaid or unearned amount as revenue or expense immediately, instead of spreading it across the periods it actually covers
• Forgetting depreciation entirely because no cash changes hands when you post it
• Confusing an adjusting entry with a correcting entry — adjusting entries handle timing; correcting entries fix actual mistakes like a wrong amount or wrong account
• Posting adjusting entries after financial statements have already gone out, instead of before

Sources

• OpenStax, Principles of Accounting, Volume 1: Financial Accounting — The Adjustment Process — free, peer-reviewed textbook covering all five types of adjusting entries