Making the Period Honest
At period-end, some revenues are earned but not invoiced, and some expenses are incurred but not paid. Without adjusting entries, the income statement mis-measures the period and the balance sheet mis-states position.
The core principle is matching: revenues belong to the period earned, and expenses belong to the period they help generate revenue.
Skip adjustments, and financial statements are fiction that happens to balance.
The Four Adjustment Flavours
| Flavour | Situation | Entry |
|---|---|---|
| Accrued revenue | Earned, not yet invoiced | Dr Asset / Cr Revenue |
| Accrued expense | Incurred, not yet paid | Dr Expense / Cr Liability |
| Deferred revenue | Cash received, not yet earned | Dr Liability / Cr Revenue |
| Deferred expense | Cash paid, not yet consumed | Dr Expense / Cr Asset |
Tip: Did cash move before or after the economic event? Cash after = accrual. Cash before = deferral. After adjustments, the trial balance becomes the adjusted trial balance.