Key points
Adjusting entries are period-end journal entries that put revenue and expenses in the month they were earned or incurred.
There are five common types: accrued expenses, accrued revenue, deferred revenue releases, prepaid amortization, and depreciation or other estimates.
Adjusting entries never touch cash; each pairs an income statement account with a balance sheet account.
At usage-based companies, missing the unbilled cloud cost accrual is the most common way gross margin gets overstated.
Every estimate needs a documented calculation, because auditors will ask how it was built.
What adjusting entries do
Adjusting entries are journal entries posted at the end of a period so revenue and expenses land in the month they were earned or incurred. They fix timing, not mistakes. Each one pairs an income statement account with a balance sheet account, and none of them touches cash.
They exist because cash and invoices rarely line up with the work. A cloud bill arrives after the month it covers. A customer pays a year up front. Usage is consumed in October and invoiced in November. Without adjustments, the ledger reflects when paper moved, not when value moved.
The five types, with usage-based examples
Type | What happened | Usage-based example | Typical entry |
|---|---|---|---|
Accrued expense | Cost incurred, not yet billed | GPU and inference compute used in October, invoice due in November | Dr expense / Cr accrued expenses |
Accrued revenue | Revenue earned, not yet invoiced | Customer overage usage consumed in October, billed in arrears | Dr unbilled receivables / Cr revenue |
Deferred revenue release | Cash received earlier, now earned | One month of an annual prepaid platform fee | Dr deferred revenue / Cr revenue |
Prepaid expense amortization | Cash paid earlier, now used up | One month of an annual software license | Dr expense / Cr prepaid expenses |
Depreciation and estimates | Cost spread over useful life, or a judgment call | Laptops depreciated over 36 months; allowance for credit losses | Dr expense / Cr contra asset |
For more on the two most common balances these create, see accrued expenses and deferred revenue.
Worked example: one month of adjustments
Fieldnote AI, a fictional Series B company with usage-based pricing, is closing October. The numbers below are illustrative. Before adjustments, the ledger holds only what was invoiced or paid during the month.
Account | Debit | Credit |
|---|---|---|
COGS: cloud inference compute | 84,000 | |
Accrued expenses | 84,000 | |
Unbilled receivables | 46,000 | |
Usage revenue | 46,000 | |
Deferred revenue | 30,000 | |
Subscription revenue | 30,000 | |
Software expense | 2,000 | |
Prepaid expenses | 2,000 | |
Depreciation expense | 2,000 | |
Accumulated depreciation | 2,000 | |
Total | 164,000 | 164,000 |
The $84,000 is an estimate from the cloud provider's usage console. The $46,000 comes from Fieldnote's metering database, priced at contract rates. The $30,000 is one twelfth of a $360,000 annual prepaid fee.
Here is what those entries do to October gross margin:
October | Before adjustments | After adjustments |
|---|---|---|
Revenue | 400,000 | 476,000 |
Cost of revenue | 60,000 | 144,000 |
Gross margin | 85.0% | 69.7% |
The unadjusted number looks healthier by more than 15 points. It is wrong because the largest cost of serving usage had not been invoiced yet. This is the most common way usage-based companies overstate margin.
Adjusting, correcting, and reversing entries
Entry | Purpose | When |
|---|---|---|
Adjusting | Put revenue and expense in the right period | Every period end |
Correcting | Fix an error, such as a wrong account or amount | When the error is found |
Reversing | Undo a prior accrual so the real invoice can be booked normally | First day of the next period |
Accruals like the $84,000 compute estimate are good candidates for reversing entries. Depreciation and prepaid amortization are not.
Common mistakes at close and audit
Accruing from last month's bill. Usage costs move with customer volume. Estimate from current consumption data, not a copy of the prior invoice.
Accruing revenue without a contract rate. Unbilled usage must be priced at the rates in the signed order form, including tiers and committed minimums.
No support attached. Auditors will ask how each estimate was built. A number with no calculation behind it becomes a finding.
Stale accruals. An accrual that never clears against an invoice inflates liabilities. Review open accruals every month.
Posting after the adjusted trial balance is pulled. Late entries break the tie between the trial balance and the reported statements.
What auditors look for
Auditors test adjusting entries in two ways. They recompute recurring ones, like depreciation and deferred revenue releases, from schedules. For estimates, they compare last period's accrual with the invoice that eventually arrived.
That second test is a look-back. If the ,000 compute accrual turns out to be ,000, the auditor will ask why, and whether the method needs to change. Keep a simple table of accrual versus actual for each estimate. It answers the question before it is asked and shows the board the estimates are reliable.
How to record adjusting entries each month
Run the unadjusted trial balance after all routine transactions post.
List recurring adjustments: deferred revenue release, prepaid amortization, depreciation, payroll accrual.
Pull usage data for the month and estimate unbilled revenue and unbilled usage costs.
Review open purchase orders and contracts for services received but not invoiced.
Book each entry with a memo, the calculation, and a link to source data.
Flag accruals that should auto-reverse on day one of the next period.
Have a second person review entries above your materiality threshold, then run the adjusted trial balance.
How Quanta handles adjusting entries
Quanta's in-house accounting team keeps the ledger, and Quanta builds integrations into the customer's usage database, Stripe, Ramp, Rippling and cloud bills. That means usage revenue and usage costs can be estimated from current data rather than last month's invoice. Every adjustment is a journal entry, so a number on the P&L traces back to the entry and the data behind it.
Quanta perspective
In usage-based businesses, the adjusting entries that matter most are the two nobody has an invoice for yet: unbilled usage revenue and unbilled compute cost. Get those from live usage data and gross margin is honest. Copy last month's bill and you will report a margin you never earned.
Frequently asked questions
Are adjusting entries required under GAAP?
Accrual accounting under US GAAP requires revenue and expenses to be recorded in the period they are earned or incurred. Adjusting entries are the mechanism most companies use to meet that requirement at period end.
Do adjusting entries ever involve cash?
No. Cash transactions are recorded when they happen. Adjusting entries move amounts between balance sheet and income statement accounts to fix timing.
When are adjusting entries made?
After routine transactions are posted and the unadjusted trial balance is run, but before the adjusted trial balance and financial statements are prepared.
What is the difference between an adjusting entry and a correcting entry?
An adjusting entry fixes timing for transactions that were recorded correctly but not yet in the right period. A correcting entry fixes an error, such as a wrong amount or account.
Do cash-basis companies make adjusting entries?
Generally not, because cash-basis books record revenue and expenses when cash moves. Most venture-backed companies need accrual books for investors and auditors, so they make adjusting entries every month.