An adjusting journal entry is a type of accounting entry made at the end of an accounting period to update certain accounts and bring them to their proper and accurate balances. These entries are necessary to ensure that the financial statements reflect the company’s economic reality and comply with accounting principles such as the accrual basis of accounting.

Adjusting journal entries are typically made for transactions and events that have occurred but have not been recorded in the general ledger. There are two main types of adjusting entries: accruals and deferrals.

1. **Accruals:**
– **Accrued Revenues:** These entries recognize revenue that has been earned but not yet recorded. For example, if a company has performed a service but has not yet billed the customer, it would make an adjusting entry to recognize the revenue.
– **Accrued Expenses:** These entries recognize expenses that have been incurred but not yet recorded. For instance, if a company has incurred expenses but has not yet received the invoice, it would make an adjusting entry to recognize the expense.

2. **Deferrals:**
– **Prepaid Expenses:** These entries adjust for expenses that have been paid in advance. For example, if a company has paid for insurance coverage for the next six months, it would make an adjusting entry to recognize the portion of the insurance expense that corresponds to the current accounting period.
– **Unearned Revenues (Deferred Revenues):** These entries adjust for revenues that have been received in advance. If a customer has paid for goods or services that have not yet been delivered, the company would make an adjusting entry to recognize the portion of the revenue that corresponds to the current period.

Adjusting journal entries are crucial for accurate financial reporting and help ensure that financial statements provide a true and fair view of a company’s financial position and performance. These entries are made before the financial statements are prepared, and they are typically part of the closing process at the end of an accounting period.