Adjusting entries vs closing entries – definitions, explanations, differences

fiscal statements reflect profitableness arsenic well as fiscal stead of a business and account is the key function on the basis of which these statements are train. Accounting process includes passing daybook entries, posting them in ledger accounts, readiness of trial counterweight and then drawing up the fiscal statements. Journal entries ( erstwhile referred to as accounting entries ) are frankincense the basis on which the entity ’ s fiscal statements are ultimately train. They are passed endlessly throughout the account period and up to the ultimate finalization of the books of accounts .
On the basis of versatile grounds, journal entries can be classified into unlike types. The article “ adjusting entries vs closing entries ” looks at entail of and dispute between two types of these entries based on their clock and purpose – adjusting entries and close entries .

Definitions and meanings

Adjusting entries

Adjusting entries are those accounting entries which are passed at the conclusion of the account period. These entries are made to align the books of accounts to the match concept and accumulation principles laid down by accounting standards. These entries are passed to ensure that the books present a more accurate picture of how the entity has performed during the period in terms of profits and cash flows and what is its current fiscal position .
Adjusting entries are chiefly of the come types :

1. Entries required for accrual of expenses incurred but not accounted for during the accounting period
Example: The report year ends on 31st December ; however, electricity bill is received on the 10th of each month. thus, pro-rata electricity expense ( on average footing ) incurred till 31st December will have to be provided for through an align submission .
[ Debit ] Electricity expense
[ Credit ] Accrued expenses
2. Entries required for recognition of income earned but not recognized during the accounting period
Example: A lend has been given on 1st December, interest of which is receivable on a quarterly basis. therefore, sake income which has accrued by 31st December ( i.e., for one month ) although not yet received is accounted for by an adjust entry .
[ Debit ] Income receivable
[ Credit ] Interest income
3. Entries required for deferment of expenses and incomes accounted for but pertaining to subsequent accounting periods
Example: Annual maintenance expenses are paid for in promote at the origin of the abridge. As on 31st December, say there are 3 months left on the contract. An adjusting submission to account for prepay expenses needs to be passed .
[ Debit ] Prepaid expenses
[ Credit ] Maintenance expenses
Adjusting entries are typically passed after compilation of the test poise but before finalization of fiscal statements .

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Closing entries

Closing entries are accounting entries passed to transfer balances of individual irregular daybook accounts to relevant permanent accounts. impermanent accounts are income and expense accounts that are created during the account period and closed at the end. At the start of entity ’ s following account time period, they are opened again but start with a zero balance. permanent wave accounts are balance wheel sail accounts whose balances are carried forward to the subsequent accountancy period. Examples of these permanent accounts include all asset and liability accounts .
Closing entries typically follow the be pattern
1. Entry required to close the temporary income accounts to income summary account

All income accounts in the daybook such as sales, sake income, rental income, other income etc. are closed and their credit rating balances are transferred to the income drumhead account .
[ Debit ] Incomes
[ Credit ] Income summary
2. Entry required to close the temporary expenses accounts to income summary account
All expense accounts in the daybook such as materials, wages, electricity, rent etc. are closed and their debit balances are transferred to the income compendious .
[ Debit ] Income drumhead
[ Credit ] Expenses
3. Entry required to close the temporary income summary account to permanent retained earnings account
The income compendious report is besides a impermanent account which is opened and used merely to empty the balances of assorted income and expense accounts in the daybook. Its balance is further transferred to a permanent balance sheet bill known as retained earnings account. The income compendious explanation is thus closed to retained earnings account .
In case of credit balance or profit:
[ Debit ] Income summary
[ Credit ] Retained earnings
In case of debit balance or loss:
[ Debit ] Retained earnings
[ Credit ] Income drumhead
4. Entry required to close dividends account
Dividends in a caller are equal to drawings in a sole proprietorship form of clientele. Since they represent secession and not expense, the balance shown by dividends account is directly transferred to retained earnings explanation by making the following closing entrance :
[ Debit ] Retained earnings report
[ Credit ] Dividends

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The above entries close entity ’ s all impermanent accounts to retain earnings account which is a permanent wave report and appears in balance sail .

Difference between adjusting entries and closing entries

Some main points of deviation between adjusting entries and close entries has been listed below :

1. Meaning

  • Adjusting entries are entries made to ensure that accrual concept has been followed in recording incomes and expenses.
  • Closing entries are entries made to close temporary ledger accounts and ultimately transfer their balances to permanent accounts.

2. Sequence

  • At the close of the accounting period, adjusting entries are passed first so that the expenses and incomes can be appropriately reflected.
  • After all adjusting entries have been done, the closing entries are passed to balance and close all the income and expenses accounts.

3. Effort involved

  • Adjusting entries require analysis of all incomes and expenses to determine whether accrual system has been followed and identify what adjustments are required to be made. Hence the effort involved is considerable.
  • Closing entries are more mechanical and simpler as they only involve arithmetical calculation and transferring of year end balance.
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4. Automation

  • As adjusting entries require application of accounting principles, human intervention may be required in an automated accounting system.
  • Closing entries most often can be passed automatically by the automated accounting system without the need for much human involvement.

5. Purpose

  • The purpose of adjusting entries is to ensure adherence to the accrual concept of accounting.
  • The purpose of closing entries is to assist in drawing up of financial statements.

6. Impact on profitability

  • Adjusting entries have an impact on profitability as they increase or decreases income and/or expenses.
  • Closing entries do not impact profitability as these entries are merely for consolidating account balances of several individual ledger accounts.

7. Examples

  • Examples of adjusting entries are extensive including:
    -: accounting for accrued expenses but not actually paid,
    -: accounting for earned revenue but not actually received,
    -: accounting for prepaid expenses for expenses paid but not accrued,
    -: creating deferred revenue for income received but not earned.
  • Examples of closing entries are only limited to a few entries discussed above.

Conclusion – adjusting entries vs closing entries:

As account entries form the basis of many compulsory fiscal statements like income instruction and poise plane, the entity must pay a proper care to record them correctly. Once accountants complete the guide of all adjust and close entries, they go for drawing up the fiscal statements. Auditors then proceed to evaluate the books including the correctness of these entries and may besides recommend changes in case they have not been correctly recorded. All in all, the ultimate goal of all these entries is that the fiscal statements should reflect a true and clean view of the entity ’ s fiscal position .