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Accounting Foundations for UAE Business Owners/Accrual vs Cash Accounting
14 min

Adjusting Entries for Accrual Accounting

Learn to prepare the four types of adjusting entries — accrued revenue, accrued expenses, prepaid expenses, and deferred revenue — and post them to the ledger.

Learning Objectives

By the end of this lesson, you will be able to:

  1. Prepare adjusting journal entries for accrued revenue, accrued expenses, prepaid expenses, and deferred revenue.
  2. Post adjustments to the general ledger.
  3. Understand the impact of adjustments on the trial balance.
  4. Recognise why adjustments are necessary before preparing financial statements.

Why Adjustments Are Necessary

At the end of an accounting period, the trial balance reflects what has been recorded in the ledger. However, some transactions have occurred but have not yet been recorded, or have been recorded in a way that needs correction for accrual-basis reporting.

Adjusting entries ensure that:

  • Revenue is recorded in the period it is earned.
  • Expenses are recorded in the period they are incurred.
  • Asset and liability balances reflect their true position at period-end.

Without adjustments, the financial statements would not comply with IFRS or with UAE Corporate Tax requirements.

Four Types of Adjusting Entries

1. Accrued Revenue

Revenue earned but not yet recorded or received in cash.

Example: A consultancy delivered AED 30,000 of services in March but has not yet invoiced the client.

Adjusting entry:

Dr Accounts receivable    AED 30,000
  Cr Revenue               AED 30,000

2. Accrued Expenses

Expenses incurred but not yet recorded or paid.

Example: Employees earned AED 15,000 in salaries in March, but payday is in April.

Adjusting entry:

Dr Salaries expense       AED 15,000
  Cr Accrued salaries      AED 15,000

3. Prepaid Expenses

Expenses paid in advance, partly or fully relating to a future period.

Example: The business paid AED 36,000 for 12 months of insurance on 1 January. By 31 March, 3 months have been used, and 9 months remain prepaid.

Adjusting entry (at 31 March):

Dr Insurance expense      AED 9,000  (3 months used)
  Cr Prepaid insurance     AED 9,000

The prepaid insurance asset retains AED 27,000 (9 months remaining).

4. Deferred Revenue

Cash received in advance for goods or services to be delivered in a future period.

Example: A business received AED 60,000 on 1 February for a 6-month contract. By 31 March, 2 months have been earned.

Adjusting entry (at 31 March):

Dr Deferred revenue       AED 20,000  (2 months earned: 60,000 × 2/6)
  Cr Revenue               AED 20,000

The deferred revenue liability retains AED 40,000 (4 months remaining).

Posting Adjustments to the Ledger

After preparing adjusting entries, they are posted to the general ledger just like any other journal entry. The adjusted trial balance is then extracted and used to prepare the financial statements.

Before adjustments: The unadjusted trial balance reflects cash transactions only.

After adjustments: The adjusted trial balance reflects accrual-basis accounting, with all revenue and expenses in the correct period.

Depreciation as an Adjusting Entry

Depreciation is a special type of adjusting entry that allocates the cost of a non-current asset over its useful life.

Example: The business bought equipment for AED 120,000 on 1 January, with a useful life of 5 years and no salvage value. Annual depreciation = AED 24,000.

Adjusting entry (at 31 December):

Dr Depreciation expense   AED 24,000
  Cr Accumulated depreciation  AED 24,000

The equipment's net book value at year-end is AED 96,000 (120,000 - 24,000).

Summary

Adjusting entries ensure revenue is recorded when earned and expenses when incurred, as required by accrual-basis IFRS. The four main types are accrued revenue, accrued expenses, prepaid expenses, and deferred revenue. Depreciation is another adjusting entry that allocates asset cost over its useful life. After posting adjustments, the adjusted trial balance is used to prepare financial statements.

This lesson is general educational content, not individualized tax or legal advice.

Practical UAE example

**For a Business Owner:** Khalid's consultancy has a year-end of 31 December. His accountant identifies the following at year-end: - AED 25,000 in unbilled services delivered - AED 10,000 in salaries earned but not yet paid - AED 8,000 in insurance paid in advance for next year - AED 15,000 received from a client for work to be done next year After adjustments, Khalid's net profit increases by AED 25,000 (accrued revenue) - AED 10,000 (accrued salaries) = +AED 15,000, but decreases by AED 8,000 (insurance now properly expensed) and decreases by AED 15,000 (deferred revenue removed from current year). Net effect depends on prior treatment. --- **For a Junior Accountant:** Fatima prepares the following adjusting entries at 31 December for her Abu Dhabi client: 1. **Accrued revenue:** AED 40,000 services delivered but unbilled - Dr Accounts receivable 40,000 / Cr Revenue 40,000 2. **Accrued expense:** AED 12,000 utilities used but not yet billed - Dr Utilities expense 12,000 / Cr Accrued expenses 12,000 3. **Prepaid expense:** AED 24,000 rent paid in advance for next year - Dr Prepaid rent 24,000 / Cr Rent expense 24,000 4. **Deferred revenue:** AED 30,000 received in advance for a contract starting next year - Dr Revenue 30,000 / Cr Deferred revenue 30,000 5. **Depreciation:** Equipment cost AED 100,000, useful life 5 years - Dr Depreciation expense 20,000 / Cr Accumulated depreciation 20,000 These adjustments transform the cash-basis ledger into accrual-basis financial statements compliant with IFRS and UAE CT requirements.

Key takeaways

  • Adjusting entries ensure revenue is recorded when earned and expenses when incurred, as required by accrual-basis IFRS.
  • The four main types are accrued revenue, accrued expenses, prepaid expenses, and deferred revenue.
  • Depreciation is an adjusting entry that allocates the cost of a non-current asset over its useful life.
  • After posting adjustments, the adjusted trial balance is used to prepare financial statements.
Knowledge check

1. A business paid AED 36,000 for 12 months of insurance on 1 January. What is the adjusting entry at 31 March?

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This lesson is general educational content, not individualized tax or legal advice. Always consult a qualified professional for your specific situation.