In manual accounting, preparing adjusting entries is the fifth step in the accounting cycle and follows the preparation and completion of the worksheet. But Sage 50 eliminates the preparation of the worksheet, and thus, the preparation of adjusting entries is the fourth step in the accounting cycle. (The preparation of the worksheet will not be discussed in this book because there is no equivalent process in computerized accounting.) Adjusting entries are entries done at year-end to bring the general ledger balances to a current balance. The balance may be off because the lapse of time between the revenues and expenses can lead to an accrual of differences in balance over the period.

Adjusting entries are not correcting entries. Since accounting is not an exact science, it is possible that some entries may be erroneous. At this step in the accounting cycle, the accountant or bookkeeper is not aware of any error that may have occurred that will affect the financial reports of the business.

In the next few sections, we will outline basic accounting principles and that underlie adjusting entries and introduce key concepts for understanding the process. Then we will discuss different types of adjusting entries.