What is the difference between adjusting entries and closing entries?

Definition of Adjusting Entries

Adjusting entries are made at the end of the accounting period (but prior to preparing the financial statements) in order for a company's financial statements to be up-to-date on the accrual basis of accounting.

Examples of Adjusting Entries

The following are hypothetical examples of adjusting entries:

  • Each day the company incurs wages expense for its hourly-paid employees. However, the payroll that includes the workers' wages for the last few days of the month won't be recorded until after the accounting period ends. Therefore, the company must prepare an adjusting entry dated for the last day of the month that debits Wages Expense and credits Wages Payable for the labor used and the amount owed.
  • Similarly, the company uses electricity each day but receives only one bill per month, perhaps on the 20th day of the month (for electricity used through the 15th day of the month). The cost of the electricity used during the last half of the month must get into the accounting records through an adjusting entry for the financial statements to show all of the expenses for the month and all of the liabilities as of the end of the month.
  • Another adjusting entry records the depreciation of assets used in the business. Every month the company must prepare an adjusting entry that debits Depreciation Expense and credits Accumulated Depreciation to report the month's depreciation.

Definition of Closing Entries

Closing entries are dated as of the last day of the accounting period, but are entered into the accounts after the financial statements are prepared. Closing entries involve the temporary accounts (the majority of which are the income statement accounts).

Example of Closing Entries

The closing entries will transfer all of the year-end balances from the revenue accounts and the expense accounts to a corporation's retained earnings account or a sole proprietorship's owner's equity account. With today's accounting software, the closing entries are effortless.