Adjusting Journal Entries: Unpaid Expenses, Advance Payments and Checks

Adjusting entries help put income and expenses in the period where they belong under the applicable accounting rules. They are not a way to make profit meet a target. Every adjustment needs a reason, a calculation and evidence that another person can understand.

The examples use Canadian dollars and leave out sales taxes to make the accounting easier to follow. They are for learning, not for preparing a specific tax return. Goods and services tax (GST), harmonized sales tax (HST), purchases of long-term assets and financial reporting may follow rules not shown in these simple examples.

1. Establish the period and the reason

Start with the legal entity and cutoff date. Ask what has been earned, consumed or incurred by that date but is not yet reflected correctly. The date a bill arrives is not always the period of the expense; the date cash arrives is not always the period of the revenue.

Separate a regular period-end adjustment from fixing a mistake. Moving a loan payment out of the wrong account is a correction. Recording a September expense before the supplier bill arrives, with proof to support it, is an accrual. You may need both, but each needs its own explanation and follow-up.

Check whether the accounting system already handles the item. Automated schedules, an entered bill or an earlier journal may already recognize it. “We always add an accrual” is not a sufficient reason to post another one.

2. Accrue a supported unpaid expense

Suppose September utilities have been consumed, but the bill has not arrived by September 30. A documented estimate supported by usage and available supplier information is $175. The illustrative adjustment debits utilities expense $175 and credits an accrued liability $175.

No cash moves in this entry. When the final bill arrives, compare its period and amount with the estimate. Decide how the accounting system will replace or clear the accrual so that the invoice does not create a second expense for the same service.

An estimate is not a fact merely because it was posted. Keep its basis, assumptions and subsequent review visible. If an estimate cannot be supported, escalate it rather than selecting a round number simply to complete the checklist.

3. Allocate a prepaid benefit over its period

Imagine a 12-month insurance policy costing $2,400, paid on September 1 and initially recorded as a prepaid asset. Assume equal monthly coverage and no other complications. At September 30, one month's $200 benefit has been consumed.

Original prepaid-insurance example — CAD

Step	Effect
Initial payment	$2,400 prepaid asset; $2,400 cash paid
September adjustment	Debit insurance expense $200; credit prepaid insurance $200
Remaining prepaid balance	$2,200 for future coverage

The schedule follows the actual coverage dates and appropriate allocation method. A mid-month start, cancellation, refund or different consumption pattern can change the calculation. Do not copy last year's monthly amount without checking the current contract and remaining balance.

4. Review customer deposits before recognizing revenue

A fictional customer prepays $900 for 15 hours of future services at $60 per hour. Assume the agreement and recognition requirements support recognizing completed hours, and six hours have been delivered by the cutoff. The earned portion is $360; $540 remains related to future work.

If the full receipt was initially recorded as a customer-deposit liability, the illustrative adjustment debits that liability $360 and credits revenue $360. Do not record the bank receipt again. If the original posting used another treatment, review the actual balances before designing a correction.

Confirm the work performed, acceptance terms, refund conditions and relevant framework. A signed contract or an issued invoice alone may not establish that all revenue is earned. This example does not determine when sales tax becomes collectible.

5. Review the journal and its next step

For each proposed entry, record the effective date, accounts, amount, evidence, calculation, preparer and approver. Verify equal debits and credits, but also check the economic meaning. Balanced entries can still affect the wrong period, entity or account.

• Compare the proposed amount with existing bills and schedules.
• Confirm that the adjustment does not duplicate cash or revenue.
• Identify any estimate and how it will be updated.
• Specify whether a reversal is needed and when.
• After posting, inspect the updated balance and report.

Do not automatically undo every adjustment next month. That undoing entry is called a reversal. Costs paid in advance normally need a schedule showing how much becomes an expense each period. An accrued expense may need a reversal or another way to clear the amount when the bill arrives. The right method depends on the system. One rule for every entry can bring the original problem back.

6. Build a controlled monthly handover

Keep accounting entries and schedules in the accounting system and authorized working papers. In Bookwits, tasks and supporting documents can coordinate the preparation, evidence request and review. Bookwits is not presented as a journal-posting engine or an accounting-policy decision maker.

When the review is done, record the reference of the actual entry, what is still uncertain and what happens next. Before using an adjustment next month, compare the opening balance with the approved schedule from the previous period. This helps avoid building up unpaid expense estimates without proof or counting the same advance payment as an expense twice.