What an adjusting entry actually is.
An adjusting journal entry (AJE) is a period-end entry that updates an account balance to reflect the economic reality at the cut-off date, regardless of whether cash has moved. The most common types are accruals (expense incurred but not yet paid, or revenue earned but not yet billed), deferrals (cash received or paid for future periods), depreciation, allowances (doubtful debts, inventory write-downs), and reclassifications (moving balances to correct accounts).
AJEs are different from routine entries because they are reasoned, not transaction-driven. A sale invoice generates a routine entry automatically. The accrual of three days of unbilled work at month end is a manual decision based on judgment. AJEs are why bookkeeping is a craft, not data entry. Skipping them or doing them sloppily is the difference between books that pass audit and books that do not.
Accrued expenses, the classic case.
You consume utilities through the month but the bill arrives on the 7th of the following month. Without an accrual, May P&L has no electricity expense and June P&L has two months of electricity. Accrual fixes this. Estimate May electricity at $35,000 based on meter reading or prior trend. Post: DR Utilities Expense 35,000 / CR Accrued Liabilities 35,000.
In June when the actual bill of $36,500 arrives, two entries. Reverse the accrual: DR Accrued Liabilities 35,000 / CR Utilities Expense 35,000. Post the actual: DR Utilities Expense 36,500 / CR Accounts Payable 36,500. Net P&L impact in June: $1,500 (the difference between estimate and actual). May was correct; June reflects the small estimation gap. With Nonari, recurring accruals auto-reverse next month and you only book the difference manually.
Accrued revenue, the mirror.
Services rendered but not yet invoiced. A consulting firm delivered 10 hours of work in the last week of June worth $250,000, but the invoice will be raised on July 5. Without accrual, June revenue is understated. Accrual: DR Unbilled Receivables 250,000 / CR Service Revenue 250,000. When the invoice is raised in July: DR Accounts Receivable 250,000 / CR Unbilled Receivables 250,000. Revenue stays in June where it was earned.
For long-running projects with milestone billings, accrued revenue can be material. A construction contract with 40% completion at year end has revenue equal to 40% of the contract value, regardless of milestone billing schedule. The percentage-of-completion method requires careful schedules and judgment. Skipping these accruals creates lumpy revenue that does not reflect actual work done.
Deferred items recognized in this period.
Prepaid expenses amortize one period at a time. Prepaid rent of $720,000 paid in July, monthly amortization $60,000: DR Rent Expense 60,000 / CR Prepaid Rent 60,000. Prepaid insurance, prepaid software subscriptions, prepaid AMCs all follow the same pattern.
Deferred revenue recognizes one period at a time. Customer paid $480,000 for 6-month subscription, monthly recognition $80,000: DR Deferred Revenue 80,000 / CR Subscription Revenue 80,000. The schedule for each prepaid and each deferred runs independently. Nonari maintains all schedules and posts the monthly entries automatically; manual systems require remembering each one.
Depreciation, monthly not annual.
Annual depreciation is wrong for monthly P&Ls. If your annual depreciation is $1.2 million on fixed assets and you only post it on June 30, your monthly P&L during the year shows zero depreciation, then a $1.2 million hit at year end. Monthly P&Ls become useless for management.
Post 1/12 each month. DR Depreciation Expense 100,000 / CR Accumulated Depreciation 100,000. At year end the GL ties to the annual amount automatically. Monthly P&Ls are smooth and comparable. The fixed asset register drives the monthly entries; with Nonari, depreciation auto-posts on close. With manual systems, build a depreciation schedule once and run it as a standing entry.
Allowance for doubtful debts.
Period-end review of AR aging. Apply your provision policy: 1% of 0-30, 5% of 31-60, 25% of 61-90, 50% of 90+. Total provision required compared to existing allowance balance. The difference is the period adjustment. Required allowance $425,000, existing balance $320,000: post DR Bad Debt Expense 105,000 / CR Allowance 105,000. P&L absorbs the increased provision.
If aging improves and the required provision is lower than the existing balance, the entry reverses: DR Allowance / CR Bad Debt Recovery (or Bad Debt Expense reversal). Periodic reassessment keeps the allowance in line with collection reality. Skipping the periodic review means the allowance becomes stale and either overstates or understates the realizable AR balance.
Inventory write-downs and provisions.
IFRS for SMEs requires inventory at the lower of cost and net realizable value. If a SKU's NRV (selling price minus selling costs) is below cost, write down the inventory. $200,000 of slow-moving stock with NRV of $120,000: post DR Inventory Write-Down 80,000 / CR Inventory Provision 80,000. Net inventory on balance sheet is now $120,000.
Other inventory adjustments include shrinkage (cycle count showed $28,000 missing), obsolescence (model phased out, sell at discount or scrap), and damage ($14,500 written off after spillage). Each is its own AJE with its own justification. Skipping these means inventory is overstated, COGS is understated, profit is overstated. Period-end review catches them.
A monthly AJE checklist that takes 30 minutes.
For a typical growing SMB at month end, the AJE list is roughly: amortize prepaid rent, prepaid insurance, prepaid software. Recognize deferred revenue per schedule. Accrue unbilled utilities. Accrue payroll for partial month if any. Post monthly depreciation. Update bad debt allowance based on aging. Update inventory provision based on slow-mover review. Reverse last month's accruals where actuals have now booked.
In Nonari, most of these auto-post from schedules; the accountant reviews and approves rather than typing. Manual systems require a checklist and discipline. Either way, the catalog is finite, the entries are predictable, and 30 minutes a month produces a P&L that is honest. Owners who skip AJEs save 30 minutes a month and lose 4 hours every quarter trying to figure out why nothing reconciles.
- Amortize all active prepayments.
- Recognize all active deferred revenue.
- Accrue known unbilled expenses and revenues.
- Post one month of depreciation.
- Update doubtful debt and inventory provisions.
- Reverse prior-month accruals as actuals book.