Adjusting entries
In one sentenceEntries recorded at the end of the period so that each period bears the revenue and expenses that belong to it, such as accruals, prepayments and depreciation.
Simply put
Some transactions do not come with an invoice or payment at the right time: the last month's electricity, the year's share of prepaid rent, and depreciation. Adjusting entries correct the balances before the statements are prepared.
They are recorded after the unadjusted trial balance and before the financial statements, and most of them do not affect cash.
Worked example
A workshop has a profit of 100,000 SAR before adjustments and has not yet recorded December electricity or the year's depreciation.
Profit before adjustments100,000 SAR
Accrued December electricity4,000 SAR
Depreciation for the year18,000 SAR
Profit after adjustments (100,000 − 4,000 − 18,000)78,000 SAR
Don't confuse it with
Closing entriesThey come after the adjustments to reset revenue and expenses to zero and transfer the profit to equity.