Adjustment Entries: Why Do Accounts Never Match Without Them?

 

  

You’re sitting with your trial balance. Everything looks neat. Debits = Credits. You feel confident.

Then suddenly…
Final accounts don’t match expectations. Profit looks wrong. Expenses feel incomplete.

You pause and think:
“Sir… everything was recorded properly. Then why is this happening?”

This is exactly where Adjustment Entries enter the picture.

 

Let’s Start With a Real Situation

Imagine a small stationery shop in Bhopal.

At the end of March, the owner says:
“Total expenses ₹50,000, income ₹80,000 — so profit ₹30,000.”

Looks simple, right?

But wait…

• ₹5,000 rent for March is still unpaid
• ₹2,000 electricity bill not received yet
• ₹3,000 stationery stock still unsold

Now tell me honestly…
👉 Is the ₹30,000 profit correct?

No.

And this is exactly why accounts never match reality without adjustment entries.

 

What Are Adjustment Entries? (Simple + Direct)

Adjustment entries are corrections or updates made at the end of the accounting period to ensure:

👉 Income and expenses are recorded in the correct period
👉 Financial statements show the true and fair view

In simple words:

“Adjustment entries fix what regular entries miss.”

 

Why Do We Even Need Adjustment Entries?

This is where most students get confused…

You think:
“Sir, we already recorded everything during the year. Why again?”

Because accounting doesn’t just record transactions —
👉 It follows the Accrual Concept

Which means:

• Income is recorded when earned (not when received)
• Expense is recorded when incurred (not when paid)

 

Real-Life Logic

Let’s say you studied for an exam for 3 months.

But results come later.

👉 Does that mean your effort belongs to result day?
No — it belongs to the time you studied.

Same with accounting.

 

Visual Analogy (Very Important)

Think of accounting like a monthly electricity meter.

• Meter shows actual usage till 31st March
• But bill may come in April

👉 If you ignore March usage just because bill came later,
your records will be wrong.

Adjustment entries ensure:

👉 “Usage and timing match correctly.”

 

Real-Life Examples (Indian Context – Step by Step)

1. Outstanding Expense (Unpaid Expense)

Example:

A coaching institute in Bhopal:

• Salary for March = ₹20,000
• Paid only ₹15,000
• ₹5,000 still unpaid

 

Step-by-Step Thinking:

• Expense belongs to March ✔
• Payment not fully done ❌

👉 So we must record full ₹20,000

 

Adjustment Entry:

Salary A/c Dr. ₹5,000
To Outstanding Salary A/c ₹5,000  

 

Impact:

• Expense increases → Profit decreases
• Liability increases

 

2. Prepaid Expense

Example:

A shopkeeper pays ₹12,000 insurance for 12 months starting Jan.

So for March end:

• Used = 3 months → ₹3,000
• Remaining = ₹9,000

 

Adjustment Entry:

Prepaid Insurance A/c Dr. ₹9,000
To Insurance A/c ₹9,000  

 

Logic:

You paid ₹12,000
But used only ₹3,000

👉 Remaining should not be treated as expense

 

3. Closing Stock

Example:

A Kirana store:

• Purchases during year = ₹1,00,000
• Closing stock = ₹25,000

 

Adjustment Entry:

Closing Stock A/c Dr. ₹25,000
To Trading A/c ₹25,000  

 

Impact:

• Reduces cost of goods sold
• Increases profit

 

4. Accrued Income

Example:

A tutor teaches classes worth ₹10,000 in March
But receives payment in April

 

Entry:

Accrued Income A/c Dr. ₹10,000
To Income A/c ₹10,000  

 

👉 Income belongs to March, not April

 

Comparison Table (Very Important)

Basis	Without Adjustment	With Adjustment
Profit	Incorrect	Accurate
Expenses	Incomplete	Fully recorded
Income	Mis-timed	Proper period
Financial Statements	Misleading	True & Fair
Decision Making	Risky	Reliable

 

Student Confusion Moments (Real Teaching Experience)

Confusion 1:

“Sir, unpaid expense means no entry, right?”

❌ Wrong thinking
👉 Students think payment = expense

✔ Correct thinking
👉 Expense is based on usage, not payment

 

Confusion 2:

“Prepaid expense is still expense, so why remove it?”

In my teaching experience, this confuses almost everyone.

✔ Think like this:

You paid ₹12,000
But used only ₹3,000

👉 Remaining ₹9,000 is not expense yet
👉 It is an asset (future benefit)

 

Common Mistakes Students Make

1. Ignoring adjustments completely
2. Recording only cash transactions
3. Mixing up prepaid and outstanding
4. Forgetting double effect (Trading + Balance Sheet)
5. Treating closing stock incorrectly

 

Wrong vs Right Thinking (Psychological Shift)

Wrong Thinking	Right Thinking
Payment = Expense	Usage = Expense
Receipt = Income	Earning = Income
Trial balance is final	Trial balance needs adjustment
Accounts are fixed	Accounts are flexible & corrected

 

Why This Matters in Real Life

Let’s say you run a business.

Without adjustments:

• Profit looks higher → you withdraw more money
• Actual liabilities hidden → cash shortage later

👉 Result: Business suffers

With adjustments:

• You see true profit
• You plan correctly
• You avoid financial mistakes

 

Personal Story (Real Teaching Moment)

I remember one student who always said:

“Sir, adjustment entries are just extra burden.”

In exams, he skipped them.

His trial balance matched… but final accounts were wrong.

After one test, I asked him:

👉 “If your salary for March comes in April, will you ignore March work?”

That day, it clicked.

Next exam — full marks in final accounts.

 

Where Adjustment Entries Are Used

• Final Accounts (Trading, P&L, Balance Sheet)
• CA Foundation / Class 11 & 12 Accounts
• Business financial reporting
• Tax computation
• Auditing

 

Practical Impact (Business + Exams)

In Exams:

• 5–10 marks directly from adjustments
• Missing them = losing easy marks

In Business:

• Shows real profit
• Avoids wrong decisions
• Ensures compliance

 

Exam Tip (Important)

👉 Always check for these keywords in questions:

• Outstanding
• Prepaid
• Accrued
• Closing stock
• Depreciation

These are signals:
👉 “Adjustment entry required here.”

 

Reflective Questions (Think Like a Pro)

1. If you don’t adjust expenses, are you showing true profit?
2. Can a business survive long-term with incorrect financial data?

 

Guidepost Topics  

• What is Accrual Concept in Accounting?
• Final Accounts Preparation Step-by-Step
• Trial Balance: Meaning and Errors

 

💡 Power Line

“Adjustment entries don’t change your accounts — they reveal the truth behind them.”

 

Quick Recap (Revision Friendly)

• Adjustment entries correct timing differences
• Based on accrual concept
• Ensure true profit and financial position
• Include outstanding, prepaid, accrued, closing stock
• Essential for exams and real business

 

FAQs

1. Why are adjustment entries passed at the end?

To match income and expenses with the correct accounting period.

 

2. Are adjustment entries compulsory in exams?

Yes. Missing them leads to incorrect final accounts and loss of marks.

 

3. Do adjustment entries affect both accounts?

Yes, always dual effect (one in P&L/Trading and one in Balance Sheet).

 

4. What is the most common adjustment?

Outstanding expenses and prepaid expenses.

 

5. Can trial balance be correct without adjustments?

Yes, but final accounts will still be incorrect.

 

6. Is closing stock always an adjustment?

Yes, it is usually given outside trial balance and requires adjustment.

 

7. What happens if adjustments are ignored?

Profit becomes misleading and financial statements lose reliability.

 

👤 Author Bio

Hi, I’m Manoj Kumar.
I hold an MBA and have practical exposure to accounting, taxation, and business concepts. Along with this, I’ve spent time guiding and explaining these subjects to students in a way that actually makes sense to them.

In my experience, most students don’t find commerce difficult — they just don’t get the right explanation. That’s where I focus. I break down concepts into simple, logical steps so they are easier to understand and remember.

Through Learn with Manika, I aim to make commerce learning clear, practical, and useful — whether you’re preparing for exams or trying to understand how things work in real life.

When I explain a concept, I always focus on the logic behind it, because once that becomes clear, confidence automatically follows.

 

📌 Disclaimer

This article is for educational purposes only and should not be considered professional advice.