A Multi-Account Period-End Adjustments Workshop

Why Period-End Adjustments Belong Together

A period-end close rarely involves just one account. A business may have earned revenue it has not billed, received cash for work it has not yet completed, used supplies or insurance already paid for, and incurred expenses it has not yet paid. It may also need to record depreciation and update its estimate of uncollectible receivables. Each adjustment brings account balances into line with activity through the reporting date.

The goal is not to record cash movements a second time. It is to recognize revenue when earned and expenses when incurred, and to leave assets and liabilities at amounts that reflect the period-end facts. The examples below assume accrual-basis accounting and a reporting date of December 31 unless stated otherwise. Each entry uses the convention that total debits equal total credits.

Definition: An adjusting entry is a period-end journal entry that records revenue earned or expense incurred in the period, or updates a related asset or liability, when the unadjusted account balances do not yet reflect that activity. An accrual records activity before the related cash receipt or payment; a deferral allocates an earlier cash receipt or payment to the period in which revenue is earned or an expense is incurred.

A useful sequence is to identify what has happened by the reporting date, calculate the amount belonging in the period, identify the accounts that are too high or too low, and then record an entry that balances. The names of the accounts depend on the business’s chart of accounts, but the underlying reasoning is consistent.

A Combined Period-End Case

The workshop below combines seven adjustments in one close. Treat the stated unadjusted balances and period-end facts as complete for these accounts. No cash payment or receipt is made as part of any adjusting entry.

Worked Example: Seven Adjustments at One Reporting Date

A hypothetical service firm closes its accounts on December 31. Its unadjusted balances include Accounts Receivable of $18,000; Allowance for Uncollectible Accounts with a $350 credit balance; Supplies of $1,200; Prepaid Insurance of $2,400; Equipment cost of $36,000; Accumulated Depreciation of $9,000; and Unearned Revenue of $5,000. The firm also has unadjusted Service Revenue of $48,000, Salaries Expense of $20,000, and Utilities Expense of $3,000. The following additional facts are established at year-end:

The firm completed $2,400 of services that it has not yet billed. The amount is to be included in receivables subject to the uncollectible-account estimate below.
Of the unadjusted Unearned Revenue balance, $1,500 relates to services completed by December 31.
Employees earned $1,100 of wages by December 31 that will be paid in January.
The $2,400 insurance payment purchased 12 months of coverage beginning October 1. Three months of coverage have elapsed by December 31.
The unadjusted Supplies balance is the amount available for use during the period. A physical count shows $450 of supplies remaining.
Equipment has zero residual value and a six-year useful life. Use a full year of straight-line depreciation for this case.
After including the unbilled services, ending receivables are $20,400. Management’s required allowance is 5% of those receivables. No write-off or other allowance entry has been recorded since the $350 credit balance arose.

1. Accrued revenue. The $2,400 service has been earned but not billed. Receivables and revenue are therefore both understated by $2,400. Record:

\begin{aligned} \text{Debit Accounts Receivable} &\quad \$2{,}400\\ \text{Credit Service Revenue} &\quad \$2{,}400 \end{aligned}

2. Unearned revenue now earned. The firm has completed $1,500 of the services for which it previously received payment. Reduce the liability and recognize revenue:

\begin{aligned} \text{Debit Unearned Revenue} &\quad \$1{,}500\\ \text{Credit Service Revenue} &\quad \$1{,}500 \end{aligned}

3. Accrued wages. Employees have already provided $1,100 of labor, so the period has incurred the expense even though cash will be paid later:

\begin{aligned} \text{Debit Salaries Expense} &\quad \$1{,}100\\ \text{Credit Wages Payable} &\quad \$1{,}100 \end{aligned}

4. Prepaid insurance used. The monthly insurance cost is $2,400 divided by 12 months, or $200 per month. Three months have elapsed, so the amount used is $200 × 3 = $600. Reduce the asset and recognize expense:

\begin{aligned} \text{Debit Insurance Expense} &\quad \$600\\ \text{Credit Prepaid Insurance} &\quad \$600 \end{aligned}

5. Supplies used. The amount used is the $1,200 available minus the $450 counted at year-end: $1,200 − $450 = $750. The entry records the consumed supplies as expense:

\begin{aligned} \text{Debit Supplies Expense} &\quad \$750\\ \text{Credit Supplies} &\quad \$750 \end{aligned}

6. Depreciation. With zero residual value and a six-year useful life, annual straight-line depreciation is ($36,000 − $0) ÷ 6 = $6,000. Record the period’s depreciation expense and increase the contra-asset balance:

\begin{aligned} \text{Debit Depreciation Expense} &\quad \$6{,}000\\ \text{Credit Accumulated Depreciation} &\quad \$6{,}000 \end{aligned}

7. Uncollectible accounts. The required ending allowance is $20,400 × 5% = $1,020. Before adjustment, the account already has a $350 credit balance. The additional credit needed is $1,020 − $350 = $670:

\begin{aligned} \text{Debit Bad Debt Expense} &\quad \$670\\ \text{Credit Allowance for Uncollectible Accounts} &\quad \$670 \end{aligned}

Check the combined effect. The two revenue adjustments increase revenue by $2,400 + $1,500 = $3,900. The five expense adjustments total $1,100 + $600 + $750 + $6,000 + $670 = $9,120. Therefore, relative to the unadjusted balances, these entries reduce period income by $9,120 − $3,900 = $5,220. Each individual entry has equal debits and credits, and the combined effect follows from the revenue and expense amounts recorded above.

Why the Reconciliation Formulas Work

Some adjustments are easiest to calculate by reconciling an account from its available or unadjusted amount to its required ending amount. Supplies provide a direct example. The supplies available for use must either have been used or remain on hand. If no other changes or losses are involved, those two amounts account for all supplies available.

\text{Supplies available} = \text{Supplies used} + \text{Supplies remaining}

Rearranging gives the adjustment for supplies used. This is why the ending count is subtracted from the amount available, rather than recorded as an additional expense.

\text{Supplies expense} = \text{Supplies available} - \text{Supplies remaining}

The allowance adjustment uses the same target-minus-current logic, with account balances treated as signed amounts. If the required ending allowance is $1,020 and the current balance is a $350 credit, the adjustment is $1,020 − $350 = $670 credit. If the current balance were instead a $100 debit, its signed balance would be −$100, so the adjustment required to reach a $1,020 credit would be $1,020 − (−$100) = $1,120 credit. The debit balance does not reduce the needed adjustment; it increases it.

Key calculation: For an allowance account adjusted to a required ending balance, the adjustment equals the required ending balance minus the account’s current signed balance. A credit balance is positive and a debit balance is negative for this calculation.

More Than One Timing Adjustment

In a combined close, revenue and expense timing can occur in different ways at once. The word “received” does not by itself establish that cash received is revenue: the work may still be owed. Likewise, the fact that an expense will be paid next month does not make it a next-period expense if the employees or supplier already provided the service this period.

Worked Example: A Retainer, Unbilled Work, and Unpaid Payroll

A hypothetical advisory firm receives $9,600 on November 1 for an eight-month service retainer and initially records the full receipt as Unearned Revenue. By December 31, it has completed two months of the contracted work. It has also completed a separate $1,750 assignment that has not yet been invoiced. In addition, five employees each worked eight hours on December 31 at $22 per hour; the payroll will be paid in January. Determine the adjusting entries and the combined income effect.

Retainer revenue earned. The retainer earns $9,600 ÷ 8 = $1,200 per month. Two months of work have been completed, so the earned amount is $1,200 × 2 = $2,400. Debit Unearned Revenue and credit Service Revenue for $2,400. The liability remaining after the entry is $9,600 − $2,400 = $7,200.

Unbilled assignment. The firm has completed $1,750 of work, so it has earned $1,750 even though billing has not occurred. Debit Accounts Receivable and credit Service Revenue for $1,750.

Payroll expense. The wages earned are 5 employees × 8 hours per employee × $22 per hour = $880. Debit Salaries Expense and credit Wages Payable for $880.

Revenue increases by $2,400 + $1,750 = $4,150. Expenses increase by $880. The period’s income therefore increases by $4,150 − $880 = $3,270 relative to the unadjusted balances. The liability for the retainer falls by $2,400, while Wages Payable rises by $880. Each entry records activity already completed or incurred by the reporting date; none records a January cash transaction.

Allowance and Depreciation in the Same Close

Depreciation and uncollectible-account estimates are both period-end expenses, but their calculations use different evidence. Straight-line depreciation allocates depreciable cost over an asset’s useful life. An allowance adjustment brings the allowance account to a required ending balance. In both cases, record the adjustment for the reporting period, not a cash payment.

Worked Example: Partial-Year Depreciation and an Allowance with a Debit Balance

A hypothetical repair shop buys equipment on July 1 for $48,000. Its estimated residual value is $6,000, and its useful life is seven years. The shop closes on December 31 and uses straight-line depreciation, with no depreciation recorded since purchase. At year-end, Accounts Receivable is $18,000. An aging estimate requires an allowance of 1% on $12,000 aged 0–30 days, 4% on $4,000 aged 31–60 days, and 20% on $2,000 aged over 60 days. The unadjusted allowance has a $100 debit balance. Calculate and record both adjustments.

Depreciation. The depreciable cost is $48,000 − $6,000 = $42,000. Annual straight-line depreciation is $42,000 ÷ 7 = $6,000. The asset was in use for six months of the year, so the partial-year amount is $6,000 × 6 ÷ 12 = $3,000. Debit Depreciation Expense and credit Accumulated Depreciation for $3,000. As a check, the recorded depreciation is half the full-year amount because six of the twelve months have elapsed.

Required allowance. Calculate the required ending balance group by group: $12,000 × 1% = $120; $4,000 × 4% = $160; and $2,000 × 20% = $400. Add these estimates: $120 + $160 + $400 = $680 required credit balance. The current allowance is a $100 debit, or a signed balance of −$100. The adjustment is $680 − (−$100) = $780 credit. Debit Bad Debt Expense and credit Allowance for Uncollectible Accounts for $780.

Check. The ending allowance is a $100 debit plus a $780 credit adjustment, leaving a $680 credit balance, as required. Net receivables are $18,000 − $680 = $17,320. The depreciation entry records $3,000 of expense for six months; the two expense adjustments together increase period expenses by $3,000 + $780 = $3,780.

Common Mistakes in a Multi-Account Close

A multi-account close makes it easy to use the right number with the wrong account, or the right account with the wrong amount. Check the timing fact and the account balance that needs to change before writing each entry.

Recognizing cash received as revenue automatically. A payment for work not yet completed remains a liability until the work is performed. Recognize only the portion earned by the reporting date.
Waiting to recognize unbilled work. If the service has been completed, the lack of an invoice does not undo the earned revenue. Record the receivable and revenue for the completed work.
Expensing all supplies available. Supplies still on hand remain an asset. The expense is the amount used: available supplies less the counted ending balance.
Using the target allowance as the adjustment. The target is the required ending balance. Subtract the existing signed balance to find the adjustment. For example, a $680 target with a $100 debit balance requires a $780 credit adjustment, not $680.
Debiting Accumulated Depreciation. Under the standard adjusting entry, record depreciation expense as a debit and Accumulated Depreciation as a credit. The credit builds the contra-asset balance.

A final review can be done without recalculating the entire close: confirm every entry has equal debits and credits, confirm each asset or liability moves in the direction implied by the facts, and compare the total revenue and expense adjustments with the resulting income change. These checks catch many arithmetic and classification slips before the adjusted balances are used.

Check Your Understanding

For each case, identify the adjustment and verify the amount against the stated period-end facts.

A consultant has completed $2,650 of work by the reporting date but has not invoiced the client. What adjusting entry is required? (Answer: Debit Accounts Receivable $2,650; credit Service Revenue $2,650.)
A business received $7,200 for a six-month service contract beginning November 1 and credited Unearned Revenue. At December 31, two months of service have been completed. What amount is earned, and what balance remains unearned from this receipt? (Answer: Recognize $2,400 of revenue; $4,800 remains unearned.)
Supplies available during the period total $1,900 from the opening balance and $600 of purchases. The period-end count is $520. Calculate supplies expense. (Answer: $1,900 + $600 − $520 = $1,980.)
A $18,000 prepaid rent payment covers 12 months beginning September 1. The reporting date is December 31. How much rent expense has been incurred, and what amount remains prepaid? (Answer: Four months have elapsed, so expense is $18,000 × 4 ÷ 12 = $6,000; $12,000 remains prepaid.)
Ending receivables are $25,000, and the required ending allowance is 4% of receivables. Before adjustment, the allowance has a $620 credit balance. Calculate the adjustment and name the entry. (Answer: Required allowance is $25,000 × 4% = $1,000; adjustment is $1,000 − $620 = $380. Debit Bad Debt Expense $380; credit Allowance for Uncollectible Accounts $380.)

What You'll Learn