Adjusting Entries & Accrual Accounting

The accrual basis is what makes financial statements meaningful — and adjusting entries are how the accrual basis actually gets recorded. This chapter takes the topic on its own terms, deeper than the single section inside The Accounting Cycle. You start with why adjustments exist at all, then work the two classic families side by side: deferrals (cash first, recognition later — prepaid expenses, supplies, unearned revenue) and accruals (recognition first, cash later — accrued expenses and accrued revenue). Depreciation follows as the year-end entry it really is: a cost spread over the periods that benefit from it, recorded whether or not anything happened on the day. It closes with the mechanics that tie it together — building an adjusted trial balance, reversing entries, and correcting an adjustment after the books have already been closed — then full year-end cases. Estimate-based adjustments such as the allowance for doubtful accounts and warranty provisions are taught in the Receivables and Liabilities chapters, where they belong. An optional final section shows an interest accrual in US GAAP terms.