# Adjusting Entries

Business I · Accounting I · https://tryals.app/learn/business-i/adjusting-entries

## 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.

$\\text{Accrual: recognise now, cash later} \\qquad \\text{Deferral: cash now, recognise later}$

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**.

## Practice questions

8 of this lesson's 13 practice questions, with answers. The full set is in the app.

### 1. Adjusting entries are made at period-end and never involve cash. Why is that the defining feature?

A. Because adjustments correct errors, and errors never involve cash
B. Because cash accounts are closed before adjustments are made
C. Because cash transactions were already recorded when they happened
D. Because cash movements are recorded only in the cash flow statement

**Answer:** C. Because cash transactions were already recorded when they happened

**Why:** The money was recorded when it moved, so the adjustment's only job is to place the earning in the right period, pure accrual mechanics with no new cash event. That is why adjustments always hit one balance-sheet and one income-statement account, never two of either.

Page: https://tryals.app/practice/business-i/adjusting-entries/adjusting-entries-are-made-at-period-end-and-never-involve-cash-why

### 2. A company receives 12,000 on October 1 for a one-year service contract. By December 31, how much revenue should be recognised?

A. 3,000, three months of a twelve-month contract
B. 6,000, half the contract period
C. 12,000, the full amount was received
D. 0, no revenue until the contract is complete

**Answer:** A. 3,000, three months of a twelve-month contract

**Why:** Three months of twelve: $12{,}000 \times 3/12 = 3{,}000$. The remaining 9,000 sits as unearned revenue (a liability) until the service is delivered.

Page: https://tryals.app/practice/business-i/adjusting-entries/a-company-receives-12-000-on-october-1-for-a-one-year-service

### 3. Which adjustments create or increase a liability?

A. Recognising unearned revenue as earned
B. Accrued interest payable
C. Accrued wages payable
D. Recognising prepaid expense as consumed

**Answer:** B. Accrued interest payable; C. Accrued wages payable

**Why:** Accrued wages and accrued interest both create new liabilities (the firm owes money it hasn't paid). Prepaid expense decreases an asset. Recognising unearned revenue decreases a liability.

Page: https://tryals.app/practice/business-i/adjusting-entries/which-adjustments-create-or-increase-a-liability

### 4. The matching principle says expenses should be recorded in the same period as the revenues they helped generate.

**Answer:** True

**Why:** Matching is the reason adjusting entries exist: cash timing is irrelevant, what matters is which period's revenue benefited from the cost.

Page: https://tryals.app/practice/business-i/adjusting-entries/the-matching-principle-says-expenses-should-be-recorded-in-the-same

### 5. Complete the adjustment logic.

**Answer:** Accruals recognise economic events where cash moves **later**. Deferrals spread economic recognition where cash moved **earlier**.

**Why:** Accrual: event now, cash later. Deferral: cash earlier, event spread over time. Together they make the income statement match economic reality.

Page: https://tryals.app/practice/business-i/adjusting-entries/complete-the-adjustment-logic

### 6. Every adjusting entry touches one balance-sheet account and one income account, never two of either. Why does that pattern hold?

A. Because each adjustment moves an amount between periods
B. Because double entry requires one account of each type
C. Because it is a presentational convention with no substantive reason
D. Because balance-sheet accounts cannot be adjusted after the period closes

**Answer:** A. Because each adjustment moves an amount between periods

**Why:** Adjustments exist to move amounts into the right period. Recognition is the income side, and the residual claim or duty is the balance-sheet side, one of each, always.

Page: https://tryals.app/practice/business-i/adjusting-entries/every-adjusting-entry-touches-one-balance-sheet-account-and-one

### 7. Accrual or deferral? Sort each adjusting entry.

**Answer:**

- Accrual: Record wages earned by employees but not yet paid, Book revenue for work finished but not yet invoiced
- Deferral: Recognise one month of a prepaid annual lease, Recognise revenue from a subscription paid in advance

**Why:** Accrual = economic event happened, cash hasn't. Deferral = cash moved, economic event hasn't fully happened yet.

Page: https://tryals.app/practice/business-i/adjusting-entries/accrual-or-deferral-sort-each-adjusting-entry

### 8. Match each adjustment type to its journal entry.

**Answer:**

- Accrued expense → Dr Expense, Cr Accrued Liability
- Accrued revenue → Dr Accrued Asset, Cr Revenue
- Prepaid expense → Dr Expense, Cr Prepaid Asset
- Unearned revenue → Dr Unearned Revenue, Cr Revenue

**Why:** Four patterns, each one a debit-credit pair that forces the books to match economic reality rather than cash timing.

Page: https://tryals.app/practice/business-i/adjusting-entries/match-each-adjustment-type-to-its-journal-entry