Adjusting-Closing Entries
Worksheets-Financial Statements
Adjusting Entries
OK, so let's take a look and discuss what type of transactions are normally recorded in the General Journal.
At the end of an accounting period (month/year), the account balances are brought up to date and amounts are adjusted to reflect their current correct balance with general journal entries that are called adjusting entries.
An adjusting journal entry is an entry in a company's general ledger that occurs at the end of an accounting period to correct any errors and record any unrecognized income or expenses for the period.
Types Of Adjusting Entries
Bank Charges & Credits
Accounts Affected:
Bank Fees & Charges / Cash In Bank
Fixed Assets
Accounts Affected:
Vehicles & Other Equipment / Depreciation Expense
Unusual Events
Accounts Affected:
Loss on Thefts / Inventory
Bad Debt Expense / Accounts Receivable
Inventory / Cost & Expense Accounts
Accounts Affected:
Office Supplies Inventory / Office Supplies Expense
Inventory /Purchases / Cost Of Goods Sold
Prepayments
Accounts Affected:
Prepaid Insurance / Insurance Expense
Prepaid Rent / Rent Expense
Accruals
Unrecorded Revenue
Accounts Affected:
Other Receivables / Other Income
Unrecorded Expense
Accounts Affected:
Expense Account / Other Liability
Closing Entries
Closing Entries are entries made at the end of a period (usually year) to reduce the "temporary" account balances (revenue, expenses, and drawing accounts) to zero and transfer the summarized balances to the capital account.
All our Income Statement Accounts are going to be set to zero and the net balance (which is actually the profit/loss) transferred to the Capital Account in the Balance Sheet Accounts. We reset our income statement account (revenues & expenses) balances to zero in order to start over and begin calculating the results for the next new period. If we didn't, the new period would have, not only the results from the new period, but also the results from the prior (older) period included.
A quick refresher about our revenue, expenses, and draw accounts.
Revenue (Income), Expenses, and Draws
Revenues, expenses, and draws are sub categories of owner's equity.
Think of owner's equity as a mom with three children to keep up with (I know she's only got one clinging to her leg but she left Expense and Draws at home). The kids are named Revenue, Expense, and Draws and each kid has one job that they are responsible for in order to earn their allowance. Kid Revenue is responsible for keeping track of increases in owner's equity and Kid Expense is responsible for keeping track of decreases in owner's equity resulting from business operations. Kid Draws has the job of keeping up with decreases in owner's equity resulting from owner withdrawals for living expenses and other personal expenses.
At the end of our period, we summarize all our kid's activities and transfer their balances to our Owner's Equity Capital Account (Mom).
What's Next ?
Trial Balance Worksheets