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 as follows:
To record any adjustments to the allowance for doubtful accounts
To record the expense related to unpaid wages at month-end
To record the cost associated with received inventory items for which no supplier invoice has yet been received
To record 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.
Related AccountingTools Courses
Comparing Adjusting Entries and Closing Entries
There are several differences between adjusting entries and closing entries. They are as follows:
Timing of entries. Adjusting entries are recorded at the end of each month, while closing entries are recorded at the end of the fiscal year.
Nature of entries. Adjusting entries modify accounts to bring them into compliance with an accounting framework, while closing balances clear out temporary accounts entirely.
Effect on financial statements. Adjusting entries ensure that revenues and expenses are recognized in the correct period for accurate financial reporting, while closing entries prepare accounts for the new accounting period by transferring net income (or loss) to equity.
Reversal in next period. Adjusting entries may be reversed in the next reporting period, while closing entries are not reversed (since they reset accounts for the next period).
FAQs
How Do Adjusting and Closing Entries Affect the Financial Statements?
Adjusting entries ensure that revenues, expenses, assets, and liabilities are properly updated so the financial statements reflect accurate, accrual-based results for the period. Closing entries do not change the current period’s reported financial statements but instead reset temporary accounts to zero for the next period. Their main impact is on the equity section, where the period’s net income is transferred to retained earnings.
Related Articles
Accounts That are Closed at Year-End
The Difference Between Adjusting Entries and Correcting Entries