Define an adjusting entry

An adjusting entry is a non-standard entry an accountant staffer makes to correct an error, ensure that corporate books are in line with business legislation or accounting guidelines, or adapt operating practices to top leadership's stipulations. Under GAAP and IFRS, adjusting entries cover items as diverse as prepaid expenses, unearned revenues, error corrections and the cumulative effect of accounting changes. Prepaid expense is a good example to understand the concept of adjusting entry. A company typically pays premiums in advance -say, remittances cover 12 months, but doesn't receive coverage immediately. For example, the business remits $24,000 to an insurance company at the beginning of the year, and this amount covers 12 months. After one month, the prepaid insurance account will show 11 months' worth of coverage, or $22,000 ($24,000 divided by 12 times 11).