What Are Adjusting Entries in Accounting and Why Do Students Find Them Confusing?

 

 

 Let me start with a situation you might have faced…

You close your notebook after completing all journal entries, feeling confident… but then your teacher says:

“Now pass the adjusting entries.”

And suddenly, confusion starts.

“But sir, we already recorded everything… what is left now?”

If this question has ever crossed your mind, you’re not alone. In my teaching experience, this is exactly the point where most students feel lost.

Let me sit with you and explain this calmly — the way I would explain it in a classroom.

 

What Are Adjusting Entries? (Simple + Direct)

Adjusting entries are entries passed at the end of an accounting period to ensure that:

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

That’s it. No heavy definition needed.

 

Why Do Adjusting Entries Exist?

This is where most students get confused…

They think accounting is about recording transactions when cash is paid or received.

But in reality, accounting follows the accrual concept.

👉 Meaning:
We record income when it is earned
We record expenses when they are incurred

Not when cash moves.

 

Think about this…

If a shop earns income in March but receives cash in April, should March profit ignore it?

Of course not.

That’s why adjusting entries exist — to correct timing.

 

A Simple Visual Analogy

Think of adjusting entries like:

👉 Final touch-ups before submitting an exam paper

You’ve written everything…
But before submission, you correct mistakes, add missing points, and improve clarity.

That final polishing = Adjusting Entries

 

Let’s Understand with Practical Indian Examples

Example 1: Outstanding Expenses (Very Common)

A shopkeeper in Bhopal pays salaries monthly.

• March salary = ₹20,000
• Paid only ₹15,000
• ₹5,000 remains unpaid

 

Step-by-step Thinking:

• Expense incurred? ✔ YES (full ₹20,000)
• Paid fully? ❌ NO

So what now?

👉 We must record full expense, not just paid amount

 

Adjusting Entry:

Salary A/c Dr. ₹5,000 

   To Outstanding Salary A/c ₹5,000

 

Example 2: Prepaid Expense

A coaching center in Indore pays rent ₹24,000 for 12 months.

• Monthly rent = ₹2,000
• Used only for 6 months = ₹12,000
• Remaining ₹12,000 is advance

 

Step-by-step:

• Paid? ✔ YES
• Used fully? ❌ NO

 

Adjusting Entry:

Prepaid Rent A/c Dr. ₹12,000 

   To Rent A/c ₹12,000

 

Example 3: Accrued Income

A freelancer in Delhi earns ₹10,000 in March but receives payment in April.

 

Step-by-step:

• Income earned? ✔ YES
• Received? ❌ NO

 

Adjusting Entry:

Accrued Income A/c Dr. ₹10,000 

   To Income A/c ₹10,000

 

Example 4: Depreciation

A business buys a machine worth ₹1,00,000 in Nagpur

• Useful life = 10 years
• Depreciation = ₹10,000 per year

 

Adjusting Entry:

Depreciation A/c Dr. ₹10,000 

   To Machinery A/c ₹10,000

 

Comparison Table (Very Important)

Basis	Without Adjusting Entries	With Adjusting Entries
Profit	Incorrect	Accurate
Expenses	Partially recorded	Fully matched
Income	May be missed	Properly recorded
Balance Sheet	Misleading	Reliable
Decision Making	Risky	Strong

 

Student Confusion Moments (Real Ones I See Often)

Confusion 1:

“Sir, if we haven’t paid, why record expense?”

👉 Answer:
Because expense is incurred, not paid.

This is accrual accounting.

 

Confusion 2:

“If we already paid rent, why reduce it?”

👉 Answer:
Because not all of it belongs to this year.

Some part is for the future → Prepaid

 

In my teaching experience, once students understand timing vs payment, 80% confusion disappears.

 

Why This Matters in Real Life

Let’s say a small business owner in Gwalior:

• Ignores outstanding expenses
• Shows higher profit

What happens?

👉 Pays more tax unnecessarily
👉 Makes wrong decisions
👉 Thinks business is doing better than reality

Adjusting entries protect you from this illusion.

 

Common Mistakes Students Make

1. Recording only cash transactions
2. Ignoring unpaid expenses
3. Forgetting prepaid expenses
4. Mixing income and cash receipt
5. Skipping depreciation

 

Wrong vs Right Thinking

Wrong Thinking	Right Thinking
Record when cash moves	Record when it happens
Profit = Cash left	Profit = Earned – Incurred
Ignore small adjustments	Every adjustment matters
Adjustment = Extra work	Adjustment = Reality check

 

Step-by-Step Approach (Golden Method)

Whenever you see an adjustment, ask:

1. Has income been earned?
2. Has expense been incurred?
3. Has cash been paid/received?
4. What is missing?

👉 Then pass entry accordingly

 

Where Adjusting Entries Are Used

• Final Accounts
• Financial Statements
• Income Tax Calculation
• Business Analysis
• Audit Reports

 

Personal Teaching Story

I remember one student who always said:

“Sir, I understand journal entries, but adjustments confuse me.”

So I gave him one rule:

👉 “Forget cash. Focus on reality.”

Within a week, he started solving questions perfectly.

Sometimes, clarity comes from changing perspective, not memorizing rules.

 

Exam Tip (Important)

👉 Always check adjustment notes in question first
👉 Each adjustment affects two places (Dual Effect)

Example:
Outstanding salary → Expense + Liability

If you miss one → marks lost

 

Reflective Questions (Think for Yourself)

• Are you still thinking accounting is about cash flow?
• Can you now identify whether something is prepaid or outstanding?

Pause and think. That’s where learning happens.

 

Power Line

👉 “Adjusting entries don’t change transactions — they correct reality.”

 

Quick Recap

• Adjusting entries are passed at the end of the period
• They ensure correct income and expense recognition
• Based on accrual concept
• Common types:
• Outstanding expenses
• Prepaid expenses
• Accrued income
• Depreciation
• Essential for true profit and correct balance sheet

 

Related Terms  

• Accrual Concept
• Matching Principle
• Final Accounts
• Depreciation
• Outstanding Expenses

 

Guidepost Topics  

• “What is the Accrual Concept in Accounting?”
• “How to Prepare Final Accounts Step by Step?”
• “What is Depreciation and Why is it Charged?”

 

FAQs

1. What is the main purpose of adjusting entries?

To ensure income and expenses are recorded in the correct accounting period.

 

2. Are adjusting entries compulsory?

Yes, without them financial statements become inaccurate.

 

3. Do adjusting entries involve cash?

No, they adjust records — not actual cash movement.

 

4. How many types of adjusting entries are there?

Common ones include outstanding, prepaid, accrued income, and depreciation.

 

5. Why do students find adjusting entries difficult?

Because they confuse cash flow with actual earning/incurring.

 

6. Do adjusting entries affect profit?

Yes, directly. They can increase or decrease profit.

 

7. Where are adjusting entries shown?

In Profit & Loss Account and Balance Sheet.

 

👤 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.