What Is Adjusting Entries: Definition And Benefits

What Are Adjusting Entries? #

Adjusting entries are changes made to your books at the end of an accounting period. Think of them as little fixes that help your records match what happened in your business. These entries keep your reports fair, clear, and up-to-date.

If you run a small business in India, adjusting entries is even more important. They help you follow tax rules like GST, plan better, and avoid mistakes in your books.

Let’s learn what they are, why they matter, and how they help your business grow.

Why Do Adjusting Entries Matter? #

They Show the Full Picture

Without adjusting entries, your financial reports might show the wrong numbers. That could mean thinking you earned more than you did—or less! With the right entries, your income and expenses match the correct periods. This makes your reports honest and useful.

They Help You Stay Legal

In India, small businesses must follow set laws regarding money. Adjusting entries helps you do just that. They help match records with GST rules and other tax laws. This saves you from trouble during audits or inspections.

When Do You Use Adjusting Entries? #

Most adjusting entries happen at the end of each month, quarter, or year. They ensure that all earnings and costs fall within the right time slot—even if no cash moves.

Imagine this: You earned money in March, but you didn’t receive your payment until April. An adjusting entry lets you show that income in March when you earned it.

Main Types of Adjusting Entries #

Accrued Revenues and Expenses

You use these when money has been earned or spent, but nothing has been paid or received yet.

Example: Your employee worked the last week of March, but you’ll pay them in April. You still add that pay in March using an “accrued salary” entry.

Prepaid Expenses

Sometimes you pay for things in advance, like insurance or rent. These entries help you spread that cost over a few months.

Example: You paid ₹12,000 for 12 months of insurance in January. Each month, you move ₹1,000 from the “prepaid” account to “expenses.”

Depreciation

Large-scale items like machines slowly lose value. We call this depreciation. Adjusting entries allows you to track how much value you lose each year.

Example: You buy a machine for ₹50,000. Over 5 years, you record ₹10,000 in depreciation each year.

Unearned Revenues

Sometimes customers pay you before you give them goods or services. You use an adjusting entry to move that money from “unearned” (what you owe them) to “earned” after you deliver.

Example: A customer pays in advance for a 6-month contract. Each month, you record 1/6 of that payment as earned.

Inventory Adjustments

At the end of the month or year, your stock may change. You need to update your records to match what’s accurately on the shelf.

Benefits for Your Small Business #

• Improved Financial Accuracy: Your reports will reflect the true financial position, helping you assess performance and identify areas needing improvement.
• Informed Decision-Making: Reliable figures enable better planning—whether it’s hiring, launching new offerings, or scaling operations.
• Reduced Risk of Errors: Mistakes are inevitable, but adjusting entries allows corrections before they impact your financial statements or tax filings.

Steps to Make Adjusting Entries #

Making an adjusting entry isn’t hard if you follow these 5 easy steps:

• Identify Accounts Requiring Adjustment: Look for items such as accrued wages, prepaid expenses, or revenue not yet earned.
• Calculate Accurate Amounts: Determine the current applicable value—how much rent has been consumed or depreciation incurred.
• Record the Adjustment: Enter the adjustment in your ledger or accounting software using appropriate journal entries.
• Verify the Trial Balance: Ensure total debits and credits remain equal after adjustments.
• Revise Financial Statements: Update your income statement and balance sheet to reflect the accurate financial position.

Common Problems – And How to Fix Them #

• Unclear Amounts: Avoid estimates. Refer to accurate records or consult a professional accountant.
• Complex Rules & Jargon: Accounting can be overwhelming. Use tools that simplify terms and procedures.
• Limited Time: Tight schedules can delay entries. Use apps to manage them efficiently.
• Inadequate Software: Generic apps may lack essential features. Opt for software tailored for Indian small businesses.
• Inventory Issues: Stock levels change frequently. Use reliable tools to monitor purchases and sales accurately.

Easy Tips to Stay on Track #

• Reconcile your accounts often. Look for mismatches right away.
• Use good accounting software to handle repeat entries.
• Keep notes on every adjustment—why you made it, what number you used, and when.
• Stay up to date with the latest GST and accounting rules.
• Set a regular schedule. Don’t wait until the last minute.

Real-Life Examples #

Small Retail Shop

Rani operates a modest grocery store in her neighbourhood. To streamline inventory and expense tracking, she uses the Vyapar app. At the end of each month, she records adjusting entries to reflect the remaining unsold inventory on her shelves.

This practice ensures her financial statements accurately represent her stock levels and revenue. As a result, her accounting records are more reliable, and tax filings have become significantly simpler and more error-free.

Consulting Firm

Vikram runs a consultancy that offers business advisory services. He often enters into contracts with clients that span six months or more. Rather than recording the entire payment as income upfront, he applies to adjust entries each month to recognize only the portion of revenue that has been earned.

This method allows him to match income with the services provided, resulting in more precise profit analysis and better cash flow forecasting.

How Vyapar App Helps #

• Live Tracking: Get real-time updates on finances, stock, and income.
• GST Help: Stay compliant with India’s tax rules. No stress, no fines.
• Easy to Use: Simple designs help you make entries even if you’re new to accounting.
• Manages Stock and Assets: Track your purchases, sales, stock levels, and equipment without confusion.

FAQ’s: #

What are adjusting entries?

Adjusting entries are changes made to show real income or expenses at the end of a period.

Why are they important?

They help your reports stay honest and match what happened.

How do they change reports?

They update your income statement and balance sheet with the correct numbers.

What if I skip them?

Your records could be wrong. This might lead to fines, bad planning, or lost money.

Do they affect tax?

Yes. They help you count expenses and income correctly, which affects taxes.

Conclusion #

Adjusting entries helps your small business run more smoothly. They might seem small, but they have a big effect on how you see—and grow—your business.

With the right habits and tools like Vyapar app, you don’t need to be a professional accountant to keep things in order.