Financial Accounting
Adjusting & Closing Entries
5 question(s)
What are adjusting entries and why are they needed?
Beginner
End-of-period journal entries (accruals, prepayments, depreciation, provisions) that bring accounts to their correct balances under the accruals concept before preparing statements.
Dr Depreciation 1,000 / Cr Accumulated Depreciation 1,000
Real-world example
Without adjustments, profit would be based on cash timing, not economic reality.
What are closing entries?
Intermediate
Entries that transfer income and expense balances to the profit and loss (and then retained earnings), resetting those accounts to zero for the next period.
Dr Sales 50,000 / Cr Income Summary 50,000 (then to Retained Earnings)
Real-world example
At year-end, revenue and expense accounts are closed so the new year starts fresh.
Give an example of closing an expense account.
Intermediate
Credit the expense to clear it and debit the profit and loss / income summary.
Dr Income Summary 800
Cr Rent Expense 800
Real-world example
All expense accounts are zeroed into the P&L at period end.
What are the main categories of adjusting entries?
Advanced
Accruals (earned/incurred but not recorded), deferrals (recorded but not yet earned/used, i.e. prepayments and unearned income), and estimates (depreciation, bad-debt provisions).
Accrued wages; Prepaid rent; Depreciation estimate
Real-world example
Estimates like bad-debt provision require judgement and are audit-sensitive.
What is the difference between permanent and temporary accounts?
Beginner
Permanent (real) accounts — assets, liabilities, equity — carry balances forward; temporary (nominal) accounts — income, expenses, drawings — are closed each period.
Cash carries forward; Sales is closed to P&L
Real-world example
Only temporary accounts are reset by closing entries.