Question

Write a Two paragraph essay on

whats is the difference betweens adjustments transactions and closings

Answer 1

The difference between Adjusting entries and closing entries are as follows:-

Adjusting entries

are made at the end of the accounting period (but prior to preparing the financial

statements) in order for a company’s accounting records and financial statements to be up-to-date

on the accrual basis of accounting. For example, each day the company incurs wages expense but

the payroll involving workers’ wages for the last days of the month won’t be entered in the

accounting records until after the accounting period ends. Similarly, the company uses electricity

each day but receives only one bill per month, perhaps on the 20th day of the month. The electricity

expense for the last 10-15 days of the month must get into the accounting records if the financial

statements are to show all of the expenses and the amounts owed for the current accounting period.

Other adjusting entries involve amounts that the company paid prior to amounts becoming expenses.

For examples, the company probably paid its insurance premiums for a six month period prior to the

start of the six month period. The company may have deferred the expense by recording the amount

in the asset account Prepaid Insurance. During the accounting period some of those premiums

expired (were used up) and need to appear as expense in the current accounting period and the

asset balance reduced.

Closing entries

are dated as of the last day of the accounting period, but they are entered into the

accounts after the financial statements are prepared. For the most part, closing entries involve the

income statement accounts. The closing entries set the balances of all of the revenue accounts and

the expense accounts to zero. This means that the revenue and expense accounts will start the New

Year with nothing in the accounts–allowing the company to easily report the New Year revenues and

expenses. The net amount of all of the balances from the revenue and expense accounts at the end of

the year will end up in retained earnings (for corporations) or owner’s equity (for sole

proprietorships). Thanks to accounting software, the closing entries are quite effortless