The difference between adjusting entries and closing entries
/What are Adjusting Entries?
Adjusting entries are recorded at the end of a reporting period to put a firm’s financial statements in conformance with the applicable accounting framework. This usually means that firms using the accrual basis of accounting and either the GAAP or IFRS accounting frameworks will record a number of adjusting entries prior to releasing their financial statements. Examples of adjusting entries are to record the expense related to unpaid wages at month-end, the cost associated with received inventory items for which no supplier invoice has yet been received, and the depreciation on fixed assets.
What are Closing Entries?
Closing entries are recorded at the end of a firm’s fiscal year, and transfer the balances in all temporary accounts (which are the revenue and expense accounts) to the entity’s retained earnings account. Doing so clears out the balances in the temporary accounts, preparing them for use in the next fiscal year. This task is usually performed automatically by the accounting software, so no manual journal entry needs to be recorded.
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Comparing Adjusting Entries and Closing Entries
There are two differences between adjusting entries and closing entries. First, adjusting entries are recorded at the end of each month, while closing entries are recorded at the end of the fiscal year. And second, adjusting entries modify accounts to bring them into compliance with an accounting framework, while closing balances clear out temporary accounts entirely.