What Are Adjusting Entries? Accruals, Deferrals, and Cut-Offs

Adjusting entries are the journal entries posted at period end to make the books tell the truth about the period. Day-to-day bookkeeping records documents as they arrive — invoices, statements, payslips. But some economic facts don't arrive as documents on time: work delivered but not yet invoiced, insurance paid last July still being consumed, equipment quietly wearing out. Adjusting entries record those facts, and they are what separates an accrual P&L that means something from a list of paperwork.

All of them serve one principle: cut-off — every period carries exactly the income it earned and the expenses it incurred, no more, no less, regardless of when cash or paper moved.

The four families

1. Accrued expenses — incurred, not yet billed

December's electricity is consumed in December; the utility bills in January. Without adjustment, December is flattered and January punished. The accrual, in euros:

Account	Debit	Credit
6209 Administrative expenses	400
49 Accrued expenses		400

When the invoice arrives in January, it posts against the accrual, not against January's expenses. Interest accruing on loans and unbilled subcontractor work follow the same shape.

2. Accrued revenue — earned, not yet invoiced

A consultancy finishes 5,000 € of contracted work in March; the invoice goes out in April. March earned it, so March records it:

Account	Debit	Credit
2910 Accrued revenue	5,000
5001 Service revenue		5,000

April's invoice then clears the accrued-revenue asset rather than double-counting the income.

3. Deferrals — cash moved, economics haven't

The mirror image of accruals. Two directions:

Prepaid expense — 1,200 € insurance paid for the year ahead sits as an asset and converts to expense one month at a time (Dr 6209 / Cr prepaid, 100 € monthly).

Deferred income — a customer pays 2,400 € in January for a 12-month subscription. January may not call that income; it is a liability — an obligation to deliver eleven more months:

Account	Debit	Credit
2710 Bank	2,400
4440 Advances received		2,400

Each month an adjusting entry releases 200 € (Dr 4440 / Cr 5001) as the service is actually delivered. This deferral pattern is the entire foundation of subscription and SaaS accounting — systematized in revenue recognition.

4. Estimates — depreciation and provisions

Some adjustments record consumption or risk that no future document will ever confirm precisely. Monthly depreciation of a 6,000 € machine over five years:

Account	Debit	Credit
6206 Depreciation expense	100
1229 Accumulated depreciation		100

Provisions — doubtful receivables, warranty obligations — follow the same logic: an estimated expense now, against a contra asset or liability, corrected later as reality reports in. These entries embed judgment (useful life, collectibility), which is why they belong to the accounting review, not the capture flow — the distinction drawn in bookkeeping vs accounting.

Reversing entries: the morning after

Accruals estimate; documents settle. The clean mechanic is the reversing entry: on the first day of the new period, the accrual is posted in reverse, so when the actual invoice arrives it books normally and the net effect lands exactly right — any difference between the 400 € estimate and the 412 € bill falls into the new period automatically. In an append-only general ledger, accrual, reversal and invoice are all on record; nothing was edited, and the audit trail reads like a narrative.

Cut-off in practice

The adjusting pass is step three of closing an accounting period: after capture and reconciliation, before review and lock. A practical checklist —

• unbilled deliveries out (accrue revenue) and in (accrue expenses);
• prepayments consumed this period, both directions;
• deferred income released for what was delivered;
• depreciation and amortization posted;
• provisions reviewed against new information.

Then the trial balance is run adjusted, statements come off it, and the period locks — at which point the cut-off is enforced, not just intended: nothing further can post into the closed month.

In Nordlet the recurring adjustments run themselves: the revenue recognition engine defers and releases subscription income on schedule and runs automatically when a period is locked via POST /v1/ledger/periods/lock, and asset depreciation posts through the assets module. What remains manual — one-off accruals, provisions — is a POST /v1/ledger/journal/transactions/create call, subject to the same balance and open-period validation as everything else.

FAQ

What are adjusting entries in simple terms?

Period-end journal entries that record economic facts no document has yet delivered — expenses incurred but unbilled, income earned but uninvoiced, prepayments consumed, assets depreciating — so the period's figures reflect what actually happened in it.

What is the difference between an accrual and a deferral?

Direction of time. An accrual records income or expense before the cash or invoice (earned/incurred now, paper later). A deferral spreads already-moved cash into the periods it economically belongs to (paid now, consumed later).

Why is deferred income a liability and not revenue?

Because the money is matched by an undelivered obligation. A prepaid annual subscription is eleven months of debt-in-services; it converts to revenue month by month as delivery happens. Calling it income on arrival overstates the period and hides the obligation.

What is a reversing entry?

The exact mirror of an accrual, posted at the start of the next period. It lets the eventual real invoice book normally while the net expense stays in the period that incurred it — and keeps the whole sequence visible in the ledger instead of edited away.

Which adjusting entries can be automated?

The recurring, rule-based ones: depreciation schedules, subscription revenue deferral and release, recurring accruals. What stays human is the judgment inside estimates — useful lives, collectibility, provision sizing — and the one-off accruals only someone close to the business knows to make.