Adjusting and Closing Entries; Accounting

Accountants undergo extensive training so that they are able to avoid making basin mistakes such as missing journal entries. A journal entry is the initial step in the accounting cycle of a business and it encompasses a record of business transactions in the accounting books of business. It details all financial transactions of a business and makes a note of the accounts that are affected. Financial experts have depicted that missing a journal entry can cause misreporting of an organization’s current period’s retained earnings and can create errors in the current or next period’s financial reports if not corrected. Therefore, is essential to explore the purpose of some of the journal entries such as closing and adjusting entries.

Adjusting entries aim at assigning correct ration of revenue and expenses to the right accounting period. A percentage of expenses is allotted to the accounting period in which it is incurred while a percentage of revenue is allotted to the accounting in which it is earned. It warrants that only the pertinent expenses and revenue are detailed in the income statement of a particular period and the financial statements have been prepared correctly in line with the accrual concept of accounting. Examples of adjusting entries include entries that change assets to expenses, and those that convert liabilities to revenue. On the other hand, closing entries are documented where accounting data in provisional accounts is summarized and moved to permanent accounts. They are part of the preparation process to make the yearly financial statements of the entity. Examples of these entries include, closing income summary, expense closing entries, and closing capital withdrawals.

Generally, closing and adjusting entries are vital journal entries in any business. They allow expenses to be entered when they are incurred and revenue to be entered when it is earned. This allows shareholders, creditors, and managers to determine the income made by a business in a given period. Such insights are essential in the analysis of the impacts of financial transactions in a business.

References

Warren, C., & Jones, J. (2018). Corporate financial accounting. Cengage Learning.

Warren, C., Jonick, C., & Schneider, J. (2020). Accounting. Cengage Learning.