How adjusting entry works
Adjusting entries are posted after the trial balance is drawn but before financial statements are finalized. Common categories include accrued expenses not yet billed, accrued revenue earned but not invoiced, prepaid expenses used up during the period, and depreciation on fixed assets. Each entry debits and credits a general ledger account so both the balance sheet and income statement match what actually happened economically during the month, rather than only reflecting the cash that moved.
Most adjusting entries are prepared during month-end close, reviewed against supporting schedules such as depreciation runs or accrual logs, then posted before the books are locked. A bookkeeper or controller checks that each entry has a clear source document or calculation behind it, since adjusting entries change reported profit and are the line items a reviewing CPA checks first. Skipping them is one of the most common reasons a small business's monthly profit figure does not match its tax return at year-end.
Example
A company pays $12,000 for a one-year insurance policy on January 1 and books it entirely to prepaid expense. At the end of January, the bookkeeper posts an adjusting entry debiting insurance expense $1,000 and crediting prepaid expense $1,000, recognizing one month of coverage used. Without this entry, January's income statement would understate expenses by $1,000 and overstate the prepaid asset on the balance sheet.
Adjusting entry in QuickBooks Online vs Xero
In QuickBooks Online, adjusting entries are posted through the journal entry screen, often tagged with an 'Adjusting Journal Entry' flag that keeps them visible to a reviewing accountant. Xero uses a similar manual journal function with a dedicated adjustment marker, and both let a bookkeeper lock prior periods once adjusting entries are finalized so posted numbers cannot change without an audit trail.
Related terms
How LedgerBPO handles adjusting entry
Our dedicated bookkeepers prepare month-end adjusting entries in your own QuickBooks Online or Xero file, backed by supporting schedules for accruals, prepaids and depreciation. A second reviewer checks every entry before the period is locked, so your financial statements reflect what actually happened that month.