adjusting entry

Think of the way you might remember, near the end of the month, that you used your generator diesel for three weeks but never wrote it down anywhere, and your landlord's rent for the shop is due even though you have not paid it yet. Your notebook of expenses is missing these things, so before you can say you truly know how your business did that month, you have to go back and add them in. That is exactly what an adjusting entry does for a company's accounts.

Businesses do not always record every cost or every bit of income exactly when cash changes hands. A shop owner in Onitsha might receive goods on credit in March but the paperwork only gets sorted in April. A landlord in London might collect a year's rent upfront in January, but only one month of that rent actually belongs to January's accounts. Adjusting entries are the entries made at the end of an accounting period to fix these timing gaps, so revenue and expenses land in the period they actually belong to.

Common examples include accrued expenses like salaries earned by staff but not yet paid, accrued revenue like services already delivered but not yet invoiced, prepaid expenses like insurance paid for the whole year but only partly used up, and depreciation, which spreads the cost of a delivery van or machine over the years it will actually be useful. Without these adjustments, a company's profit figure could look far better or far worse than reality.

This matters to anyone who reads financial statements, whether you are a small trader trying to know your true profit, an investor in Lagos checking a company's annual report, or a Nigerian in Manchester filing accounts for a small consultancy. Adjusting entries are usually made by an accountant just before the books are closed and the financial statements are prepared, and they are one reason a chartered accountant's work matters so much.