Everything journalized so far was triggered by a document, such as an invoice, a bank credit or a payment. But by 30 April, five economic events have happened at Meridian without any paperwork at all. A month of prepaid shop space has been used up. The equipment is one month older. The bank loan has grown a month of interest. A part-time helper has worked all of April but won't be paid (₹10,000) until 5 May. And some sliver of the hotel receivable may, realistically, never be collected. Adjusting entries record these events. You make them at every period end, before the statements are prepared, and they come in two families with two members each:
| Family | Type | Cash moved… | The adjustment records… | Meridian's case |
|---|---|---|---|---|
| Deferrals (cash first, economics later) | Prepaid expense | already paid | the portion now used up as expense | rent |
| Unearned revenue | already received | the portion now earned as revenue | caterer's advance | |
| Accruals (economics first, cash later) | Accrued expense | not yet paid | expense incurred, liability recognized | interest; helper's wages |
| Accrued revenue | not yet received | revenue earned, receivable recognized | (none this month) |
There's also a special systematic deferral called depreciation, where an asset bought long ago is turned into expense over its life. Two features mark every adjusting entry. Each one touches at least one income-statement account and one balance-sheet account. And none of them ever touches Cash, because the cash entries came from documents and adjustments only fix timing.
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Adjusting entries examples
(A1) Rent: one month of the prepayment has expired. ₹1,80,000 ÷ 12 = ₹15,000 is no longer a future benefit. It's been used up.
Dr Rent Expense 15,000
Cr Prepaid Rent 15,000Prepaid Rent now shows 1,80,000 − 15,000 = ₹1,65,000, which is 11 months of future occupancy. Now the balance-sheet number means something again.
(A2) Depreciation: the equipment gave up 1/60 of its working life. ₹2,40,000 ÷ 60 months = ₹4,000. We could credit Equipment directly, but we choose not to. You'll see why in the contra-accounts section ahead.
Dr Depreciation Expense 4,000
Cr Accumulated Depreciation — Equipment 4,000(A3) Interest: the loan has been outstanding one month. ₹4,00,000 × 12% × 1/12 = ₹4,000, incurred but not payable until later. That makes it an accrued expense and a new liability.
Dr Interest Expense 4,000
Cr Interest Payable 4,000(A4) Helper's wages: work received in April, payment due 5 May. Under the matching principle, April has to carry this cost.
Dr Salaries Expense 10,000
Cr Salaries Payable 10,000Salaries Expense now totals 36,000 + 10,000 = ₹46,000. That's the true cost of April's labour, whatever the payment dates.
What about expected credit losses and unearned revenue?
(A5) Expected credit losses: facing up to the receivable. Meridian is owed ₹1,20,000. Experience across trade businesses says some receivables die. If you waited until a specific customer defaulted, April would book the full revenue while some future month ate the loss, and that breaks matching. So we estimate, say 2% of closing receivables, which is ₹2,400, and record it now:
Dr Bad Debt Expense 2,400
Cr Allowance for Doubtful Accounts 2,400This credit goes to another contra account, which you'll meet shortly. Accounts Receivable itself stays untouched. Meridian still means to chase the full ₹1,20,000. It just doesn't expect to catch it all. In the revenue and inventory module ahead, this estimating instinct grows into a full framework, ECL under Ind AS 109/IFRS 9 and CECL under US GAAP. The 2% here is illustrative.
(A6) The non-adjustment: check the unearned revenue. Has any of the caterer's ₹60,000 been earned by 30 April? No delivery has happened, so no. The full amount stays a liability. Part of the job is checking every deferral at period end, and sometimes the right answer is no entry at all.
What does the adjusted trial balance look like?
The adjusted trial balance, 30 April:
| Account | Dr (₹) | Cr (₹) |
|---|---|---|
| Cash | 10,12,000 | |
| Accounts Receivable | 1,20,000 | |
| Allowance for Doubtful Accounts | 2,400 | |
| Inventory | 2,54,000 | |
| Prepaid Rent | 1,65,000 | |
| Equipment | 2,40,000 | |
| Accumulated Depreciation — Equipment | 4,000 | |
| Accounts Payable | 2,00,000 | |
| Unearned Revenue | 60,000 | |
| Salaries Payable | 10,000 | |
| Interest Payable | 4,000 | |
| Bank Loan | 4,00,000 | |
| Share Capital | 10,00,000 | |
| Sales Revenue | 5,60,000 | |
| Cost of Goods Sold | 3,50,000 | |
| Salaries Expense | 46,000 | |
| Rent Expense | 15,000 | |
| Utilities Expense | 8,000 | |
| Depreciation Expense | 4,000 | |
| Interest Expense | 4,000 | |
| Bad Debt Expense | 2,400 | |
| Dividends | 20,000 | |
| Totals | 22,40,400 | 22,40,400 |