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Adjusting Journal Entries: The Five Types, Examples and How to Automate Them at Month End

Sherman Hsieh
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Adjusting Journal Entries: The Five Types, Examples and How to Automate Them at Month End

Last updated: October 11, 2026 · Independent guide · We do not sell rankings or coverage.

Adjusting journal entries are the entries you post at the end of a period so the books follow accrual accounting: revenue in the period it is earned, expenses in the period they are incurred, and assets at the amounts you expect to recover. There are five types: accruals, deferrals, depreciation, estimates such as the allowance for credit losses, and inventory adjustments. Each one moves an amount between a balance sheet account and an income statement account, and none of them touches cash. Accounting systems can post the repeatable ones on a schedule, and Sage Intacct and NetSuite can also reverse accruals automatically.

The five types and their journal entries

Account names vary by chart of accounts, but the direction of each entry does not.

Account Debit Credit Note
Expense (for example, utilities or contract labor) X 1. Accrued expense: cost incurred, no bill yet
Accrued liabilities X Usually set to auto-reverse on day 1 of next period
Unbilled receivables X 1. Accrued revenue: earned, not yet invoiced
Revenue X Reverse when the invoice posts
Expense (for example, insurance or software) X 2. Deferral: amortize a prepaid asset
Prepaid expenses X Do not auto-reverse
Deferred revenue X 2. Deferral: earn cash received in advance
Revenue X Do not auto-reverse
Depreciation expense X 3. Depreciation (amortization for intangibles)
Accumulated depreciation X From the fixed asset register
Credit loss (bad debt) expense X 4. Estimate: true up the allowance
Allowance for credit losses X Post only the change from the current balance
Cost of goods sold (shrinkage or write-down) X 5. Inventory adjustment
Inventory (or inventory reserve) X From a physical count or a net realizable value review

Worked example: one month-end close

The figures below are an illustration. A distributor is closing October 2026.

Step 1: Accrue an expense. A temporary staffing agency worked in October and will invoice on November 8. The timesheets approved in October total $4,200. Debit contract labor expense $4,200 and credit accrued liabilities $4,200, with an automatic reversal dated November 1.

Step 2: Amortize a prepaid. On September 1 the company paid $18,000 for a 12-month software subscription and recorded it as a prepaid asset. October’s share is $18,000 ÷ 12 = $1,500. Debit software expense $1,500 and credit prepaid expenses $1,500. Our prepaid expense amortization guide covers mid-month starts.

Step 3: Record depreciation. A delivery van cost $54,000, has an estimated salvage value of $6,000 and a five-year life. Straight-line depreciation is ($54,000 − $6,000) ÷ 60 months = $800 a month. Debit depreciation expense $800 and credit accumulated depreciation $800.

Step 4: Update the credit loss estimate. The company applies loss rates to its receivables aging:

Aging bucket Balance Loss rate Required allowance
Current $310,000 1% $3,100
1 to 30 days past due $85,000 3% $2,550
31 to 60 days past due $32,000 10% $3,200
61 to 90 days past due $12,000 25% $3,000
Over 90 days past due $9,000 50% $4,500
Total $448,000 $16,350

The allowance already carries a credit balance of $12,900, so the entry is the difference: debit credit loss expense $3,450 and credit allowance for credit losses $3,450.

Step 5: Adjust inventory. The perpetual record shows $412,600, but counts support $409,850, so debit cost of goods sold $2,750 and credit inventory $2,750 for shrinkage. A discontinued line costs $6,400 but will sell for about $3,900 net of selling costs, so debit cost of goods sold $2,500 and credit inventory $2,500 to reach net realizable value.

Account Debit Credit Note
Contract labor expense / Accrued liabilities $4,200 $4,200 Auto-reverses November 1
Software expense / Prepaid expenses $1,500 $1,500 Recurring, 12 months
Depreciation expense / Accumulated depreciation $800 $800 Recurring, 60 months
Credit loss expense / Allowance for credit losses $3,450 $3,450 Recalculated monthly
Cost of goods sold / Inventory $5,250 $5,250 Shrinkage $2,750 plus write-down $2,500
Total $15,200 $15,200 Pre-tax income falls by $15,200

On November 1 the system posts the reversal: debit accrued liabilities $4,200 and credit contract labor expense $4,200. When the agency’s $4,350 invoice is entered on November 8, November carries only the $150 difference, and October keeps the $4,200 it incurred.

Which adjustments should reverse

Reverse an entry only when a later transaction will record the same amount again. Accrued expenses and accrued revenue fit that test, because the vendor bill or customer invoice posts the full amount in the next period. Without a reversal, you double count the expense or AP must code the bill against the accrual by hand.

Deferral amortization, depreciation, the credit loss true-up and inventory adjustments should not reverse, because no later transaction corrects those balances. Auto-reversing a depreciation or prepaid entry cancels the expense on day 1 of the next month.

The supporting schedule behind each entry

Every adjusting entry needs a schedule that ties to the general ledger balance after posting. Accruals need timesheets, receipts or contract terms, and later the actual invoice. Deferrals need an amortization schedule with the original amount, months used and remaining balance. Depreciation needs a fixed asset register that foots to the asset and accumulated depreciation accounts, which fixed asset software maintains for you.

The allowance needs the aging, the loss rates and the reasoning behind them. Inventory needs count sheets, the variance report and the net realizable value review. Attach each schedule to the entry in your system so the reviewer sees it from the journal.

The standards behind the entries

Credit losses on trade receivables fall under ASC 326, which measures expected losses using history, current conditions and forecasts (FASB, June 16, 2016). ASU 2025-05 lets any entity assume that current conditions at the balance sheet date do not change over the remaining life of current receivables, and lets entities other than public business entities that use this expedient consider cash collected after the balance sheet date. It applies to annual periods beginning after December 15, 2025 (FASB, July 2025).

Inventory measured on FIFO or average cost must be carried at the lower of cost and net realizable value, defined as estimated selling price less reasonably predictable costs of completion, disposal and transportation. LIFO and retail method inventory keep the older lower of cost or market test (FASB, July 2015).

Tax can differ from book. An accrual-method taxpayer deducts a liability only when all events fixing it have occurred, the amount is determinable with reasonable accuracy and economic performance has occurred (eCFR, 26 CFR 1.461-1, up to date as of October 7, 2026).

Internal adjustments versus auditor-proposed AJEs

Your own adjusting entries are part of the close. Auditor-proposed adjusting journal entries come after fieldwork finds misstatements. Under PCAOB standards, the auditor accumulates misstatements other than those that are clearly trivial and communicates them to management on a timely basis (PCAOB AS 2810, no date shown). AU-C 450 applies the same accumulate-and-communicate approach to private company audits (Open Exam Prep, September 2026); the full text sits in the AICPA’s currently effective auditing standards (AICPA, September 2, 2026).

Three differences matter. First, you decide whether to post a proposed entry: when an auditor makes journal entries as a nonattest service, the client must designate someone with suitable skills to oversee, evaluate and accept responsibility for the work (Journal of Accountancy, November 1, 2016). Second, entries you decline to post become passed adjustments, and management represents in writing that the uncorrected misstatements on the attached schedule are immaterial (PCAOB AS 2805, effective for periods ending on or after June 30, 1998). Third, audit adjustments belong to a closed year, so post them to a year-end adjustment period or a flagged journal, not to January.

Auditors also test your own entries. PCAOB AS 2401 points them to period-end and post-closing entries with little explanation, seldom-used accounts, unusual preparers and round amounts (PCAOB AS 2401, no date shown).

Common mistakes

  • Booking the full required allowance instead of the change from the current balance.
  • Auto-reversing deferrals or depreciation, which cancels the expense the next month.
  • Forgetting to stop a recurring entry when the prepaid or asset is fully amortized, which drives the balance negative.
  • Accruing from a budget instead of evidence such as receipts, timesheets or contract terms.
  • Posting manual adjustments to control accounts (AR, AP, inventory) so the subledger no longer agrees with the ledger.
  • Posting auditor entries in the current period rather than the year they relate to.

How adjusting entries are reported

Adjustments flow into the adjusted trial balance, which feeds the financial statements. The allowance reduces accounts receivable, accumulated depreciation reduces property and equipment, and inventory write-downs sit in cost of goods sold. Before sign-off, run a journal report for the period so the reviewer sees every adjustment in one place; our guide to close automation covers review workflows.

Setting up recurring and reversing adjustments in QuickBooks Online, Sage Intacct and NetSuite

QuickBooks Online. Create templates under All apps > Accounting > Recurring transactions > New and choose Scheduled, Reminder or Unscheduled; Intuit lists depreciation as an example of a scheduled template (Intuit, updated August 5, 2026). Fixed-amount journal entries can use Make Recurring (Intuit, updated August 5, 2026). We found no auto-reverse setting in Intuit’s documentation: you select Reverse on a saved entry, and QuickBooks dates the reversal the first day of the next month (Intuit, August 5, 2026). In QuickBooks Online Accountant, the Is Adjusting Journal Entry? checkbox flags an entry, and the Adjusted Trial Balance report shows balances before and after adjustments (Intuit, no exact date shown).

Sage Intacct. Recurring entries live under General Ledger > All > Journal entry templates, where you add a recurring transaction template with a start date, repeat interval and end rule. The template can reverse automatically after a set delay or on its own schedule. Scheduled jobs must be on in Company information, and custom reporting periods are not supported (Sage Intacct Help, last modified October 8, 2026). GAAP and tax adjusting journals sit under General Ledger > All > GAAP adjusting and Tax adjusting, each with an optional automatic reversal date (Sage Intacct Help, last modified October 8, 2026). Entries created in subledgers such as AP cannot be reversed in the General Ledger (Sage Intacct Help, last modified October 8, 2026).

NetSuite. On Transactions > Financial > Make Journal Entries, enter a Reversal Date. With Defer Entry checked, the reversal is created automatically on that date; cleared, the reversal is entered immediately with the Reversal Date as its transaction date (Oracle NetSuite Help, no date shown). For recurring entries, choose Actions > Memorize on a journal, set Action to Automatic or Reminder, and set the frequency on the Recurring subtab (Oracle NetSuite Help, no date shown). NetSuite can generate a one-day adjustment period at the end of the fiscal year, and that period accepts only journal entries (Oracle NetSuite Help, no date shown). Our QuickBooks to NetSuite migration guide covers period setup.

How we researched this

We read the QuickBooks Online, Sage Intacct and NetSuite help pages in October 2026 and used only menu paths shown there. Rules come from FASB updates, PCAOB standards and the eCFR. The top-ranking explainers we reviewed, from Corporate Finance Institute, HighRadius (which sells close software) and Upwork, did not cover reversal settings, supporting schedules or auditor AJEs. Example figures are illustrations.

Related guides

Frequently asked questions

What are the five types of adjusting journal entries?

The five types are accruals, deferrals, depreciation, estimates such as the allowance for credit losses, and inventory adjustments. Some textbooks group depreciation and inventory under estimates and list three types. The entries themselves are the same either way.

Which adjusting entries should be reversing entries?

Accrued expenses and accrued revenue are the usual reversing entries, because the vendor bill or customer invoice records the full amount in the next period. Depreciation, prepaid amortization, deferred revenue, the allowance true-up and inventory adjustments should not reverse.

Can QuickBooks Online automatically reverse a journal entry?

Intuit’s documentation describes a manual Reverse action, not an automatic reversal setting. The reversal is dated the first day of the following month. You can schedule fixed-amount journal entries as recurring transactions.

What is the difference between an internal AJE and an auditor’s proposed AJE?

An internal AJE is one your team posts during the close. An auditor-proposed AJE comes from misstatements found during the audit, and management decides whether to record it. Entries left unrecorded are listed as uncorrected misstatements in the management representation letter.

Sources

Sherman Hsieh

CEO & Editor-in-Chief, Business-Software.com
Independent analysis of enterprise software — ERP, CRM and more
Sherman Hsieh is the founder, CEO, and editor-in-chief of Business-Software.com. He leads the site's independent, buyer-focused coverage of ERP, CRM, and other business systems, including vendor-neutral comparisons, pricing analysis, and implementation guidance. Before founding Business-Software.com, Sherman was an executive at Siebel ...

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