Why it matters
Without adjusting entries, a set of books shows the cash that moved, not the income the business earned. The close, the financial statements and the tax return all depend on the period being cut off correctly.
Example
A client received a $6,000 invoice for December utilities but has not paid it by December 31. The bookkeeper records an adjusting entry to expense $6,000 and record a payable, so the December profit includes the cost.
Related terms
Questions about Adjusting entry
When are adjusting entries made?
They are made at the end of an accounting period, before the financial statements are prepared. A monthly close may have a few adjustments, and a year-end close usually has more.
Are adjusting entries the same as closing entries?
No. Adjusting entries update the balances for the period. Closing entries move the temporary income and expense balances into retained earnings at year end.