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Adjusting entries for accruals, prepaids and deferrals
Adjusting entries connect the ledger to the period being reported. Begin with supporting documents and a clear explanation of timing, then distinguish the bookkeeping entry from the tax treatment your CPA approves.
This guide describes common bookkeeping practice, not a legal or regulatory requirement.
Last reviewed:
General information, not legal or tax advice.
Accrue an expense from evidence of the obligation
For accrual-method tax reporting, IRS guidance combines the all-events test with economic performance. Its supplies example distinguishes receipt and billing from a later payment. In the books, retain the invoice, service period and approval behind an accrual so another reviewer can understand what remains unpaid.
Sources: IRS Pub 538
Track the period covered by a prepaid cost
An advance payment may cover benefits beyond the current reporting period. Publication 538 describes tax deductibility and the 12-month rule, including limits tied to the benefit period and following tax year. Those tax rules are not interchangeable with book adjusting entries; ask your CPA to approve the tax treatment.
Sources: IRS Pub 538
Keep customer advances visible until reviewed
IRS guidance generally includes advance payments in income when received, with an accrual-method election permitting qualifying deferral to the following year. For bookkeeping, maintain a customer deposit schedule showing the work still owed. A liability account in the ledger does not itself establish a tax deferral election.
Sources: IRS Pub 538
Check closing activity before adding another entry
The IRS describes closing income and expense accounts while keeping balance-sheet accounts open. QuickBooks Online moves prior-year net income into retained earnings when a new fiscal year begins. Review existing closing behavior before posting manual adjustments, and preserve the preparer’s explanation for each approved change.
Sources: IRS Pub 583; Intuit QuickBooks support
Sources: accrue an expense from evidence of the obligation
Make adjusting entries traceable
Tidwell helps reconcile the books and organize supporting schedules for your business decisions. We work with your CPA on tax questions and the financial records they need.