Adjusting Journal Entry (AJE)

An adjusting journal entry is a period-end entry recorded to bring account balances into conformity with the applicable accounting framework before financial statements are issued. Adjusting entries exist because routine transaction processing follows cash and invoice events, while accrual accounting requires revenue and expense to be recognized when earned and incurred.

The recurring categories are well established. Accrued expenses record obligations incurred but not yet invoiced — professional fees, utilities, bonuses, interest. Accrued revenue records amounts earned but not yet billed. Prepaid expense amortization moves previously capitalized costs into expense as the benefit is consumed. Unearned or deferred revenue defers amounts billed in advance of performance. Depreciation and amortization allocate the cost of long-lived assets. Reserve and allowance entries adjust receivables, inventory, and warranty obligations to expected realizable amounts.

A distinction matters in practice between entries the company records itself and entries proposed by an auditor or tax preparer. Auditor-proposed adjustments are accumulated during fieldwork and presented to management, which decides whether to record them; those declined are aggregated on a summary of uncorrected misstatements and evaluated against materiality, both individually and in combination, before the opinion is issued. Reclassification entries, which move amounts between accounts without changing net income, are tracked separately.

Controls around journal entries receive close attention because manual entries are the mechanism by which most financial statement fraud is executed. Expected controls include documented support for every entry, preparer and reviewer segregation, restrictions on who may post to sensitive accounts, and periodic review of entries posted outside normal patterns — unusual amounts, round dollars, entries recorded after the close, or entries by users who do not ordinarily post.