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The Corporate Finance Institute
Accounting
Why do we need to adjust journal entries?
Adjusting entries are required at the end of each fiscal period to align 
the revenues and expenses to the “right” period due to the matching 
principle in accounting. In general, there are two types of adjusting 
journal entries: accruals and deferrals. Adjusting entries generally occur 
before financial statements are released. The two main categories 
where adjustments arise are:
•
Accruals: Revenues earned or expenses incurred that have not been
previously recorded
•
Deferrals: Receipts of assets or payments of cash in advance of
revenue or expense recognition
Adjusting Entries
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corporatefinanceinstitute.com
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The Corporate Finance Institute
Accounting
An example of adjusting entries
Consider XYZ Company that took out a loan from a bank on December 
1, 2017. The first interest payment is to be made on June 30, 2018 and 
the company is preparing its financial statements for the year ending 
December 31, 2017. Even though the interest payment is to be made on 
June 30 in the following year, to properly report the company’s financial 
status, the company must accrue the interest expense for the month 
of December and include that value even though the expense was not 
actually paid (i.e. an exchange in cash). This is an accounting system 
called the accrual basis of accounting. 
The accrual basis of accounting states that expenses are matched with 
its related revenues and are reported when the expense is incurred, not 
when cash changes hand. Therefore, adjusting the entries are required 
because of the matching principle in accounting.
Four types of adjusting journal entries
There are four specific types of adjustments: