ELI5: Explain Like I'm 5

Adjusting entries

Okay kiddo! So, do you know what a piggy bank is? Yes? Great! So let's pretend that a business has a piggy bank too, but instead of putting in coins and bills, they put in information about how much money they've made and spent during the year.

Now let's say at the end of the year, the business has to check if the information in the piggy bank is correct. To do this, they have to make some adjustments! Adjustments are like fixing mistakes you made earlier in the year, kind of like how you might go back to your piggy bank and add in money you forgot to put in earlier.

For example, let's say the business forgot to pay their water bill for three months. They would have to go back and adjust the amount of money they spent on water for those three months to make sure they have a correct record of their expenses.

Another example would be if the business bought a new computer for $1,000 at the beginning of the year, but they know that the computer will last for three years. They can't just put all $1,000 as an expense in the first month because that would make their records incorrect. Instead, they would have to adjust the amount of expense for each month of the year to make sure only a portion of the cost is counted each month.

So, adjusting entries are just a way for businesses to go back and fix any mistakes or updates they need to make to their records so that they are correct for the entire year. Just like how you might go back to your piggy bank and add in any missing coins or bills, a business goes back to their records and adjusts them to make sure they have an accurate picture of their financial situation.