Adjusting entries and closing entries
The adjusting entries are journaling entries prepared specifically at the close of each accounting period. This is so purposely to ensure that the organization or business’s accounts are up to date. The main reasons for preparing the adjusting entries are to record estimated items, accrued items and to apportion differed and prepaid items (Nikolai, Bazley & Jones, 2009). The closing entry is also made at the end of every accounting period but with a different purpose to reduce the balances occurring in each of the temporary accounts to zero and in updating the retained earnings account.
Adjusting entries is vital in avoiding burdens and limitations accompanied by a daily recording of operations that expire with time rather than instant consumption such as rent, daily earnings of employees and insurances (Weygandt, Kimmel & Kieso, 2009). Such incurrence is easily recorded during the expiration period either monthly or annually (. There are also cases such as daily consumption of supplies, a daily recording of such a transaction would prove highly inefficient and energy and time consuming (Weygandt, Kimmel & Kieso, 2009). The final recording will take into account such minute transactions and ensure that the records conform to the revenue and expense recognition principles.
The preparation of the closing entry account demands the opening of the profit and loss account trading and manufacturing accounts in which revenues and expenses, also identified as nominal accounts, are entered based on the principle of accrual (Weil & Noi, 2001). Closing entry accounts can be either simple or compound. In simple closing entry accounts, same amounts are credited and debited while in compound accounts one is debited as the others are debited and vice versa or several accounts re debited as others are credited (Rao, 2012).
References
Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2009). Intermediate accounting (book only). New York, NY: Cengage Learning.
Rao, M. (2012) Fundamentals of accounting for Cpt. New York, NY: PHI Learning Private Limited.
Weil, S. H., & Noi S. A. (2001). Introductory accounting skills: For financial and management accounting students. New York, NY: Software Publications Pty, Limited,
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Financial Accounting. New York, NY: John Wiley and Sons