Part I What are adjusting entries and why are they needed? Please give an example of 2 adjusting entries and their purpose. Part II What are closing entries? Why are they needed? Please give an example of 2 closing entries
Part 1 – Adjusting entries are those entries which are passed at the end of a specified period to record those transactions which are not yet journalised as actual cash flow does not take place but belongs to that specific period. These entries are passed in order to follow the matching principle which asks all the expenses to be recorded which belongs to that period revenues.
Example:- Interest expense Dr. Interest payable Cr. ( To record intt. exp. on notes payable )
Depreciation exp. Dr. Accumulated depreciation Cr. ( To record dep. exp.)
Part 2 – closing entries are passed to close all the temporary accounts ( revenues, expenses, dividend , income summary , drawings ) to a single account Like revenues and expenses account are closed by transferring their balance to income summary and income summary is closed by transferring its balance to capital / retained earnings account.
Example:- Service revenue Dr. income summary Cr. ( to close revenue account )
income summary Dr. capital / retained earnings account Cr. ( to close income summary account )