Question

I need a summary with an explanation  of Adjusting and closing entries and classified balance sheet . For my accounting class please.

Answer 1

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Explanation of Adjusting Entries:

An adjusting entry is an entry in a company's general ledger that occurs at the end of an accounting period to record any unrecognized income or expenses for the period. When a transaction is started in one accounting period and ended in a later period, an adjusting journal entry is required to properly account for the transaction. Adjusting journal entries can also refer to financial reporting that corrects a mistake made previously in the accounting period.

The purpose of adjusting entries is to convert cash transactions into the accrual accounting method. Accrual accounting is based on the revenue recognition principle that seeks to recognize revenue in the period in which it was earned, rather than the period in which cash is received. An adjusting journal entry involves an income statement account (revenue or expense) along with a balance sheet account (asset or liability). It typically relates to the balance sheet accounts for accumulated depreciation, allowance for doubtful accounts, accrued expenses, accrued income, prepaid expenses, deferred revenue, and unearned revenue. Income statement accounts that may need to be adjusted include interest expense, insurance expense, depreciation expense, and revenue. The entries are made in accordance with the matching principle to match expenses to the related revenue in the same accounting period. The adjustments made in journal entries are carried over to the general ledger which flows through to the financial statements.

In summary, adjusting journal entries are most commonly accruals, deferrals, and estimates. Accruals are revenues and expenses that have not been received or paid, respectively, and have not yet been recorded through a standard accounting transaction. Deferrals refer to revenues and expenses that have been received or paid in advance, respectively, and have been recorded, but have not yet been earned or used. Estimates are adjusting entries that record non-cash items, such as depreciation expense, allowance for doubtful accounts etc.

Some of the most common types of adjusting entries are:

a) Accrued Revenue

b) Accrued Expenses

c) Deferred Revenue

d) Prepaid Expenses

e) Depreciation Expenses

Explanation of Closing Entries:

A closing entry is a journal entry made at the end of the accounting period. It involves transfer of data from temporary accounts on the income statement to permanent accounts on the balance sheet. All income statement balances are eventually transferred to retained earnings. The purpose of the closing entry is to reset the temporary account balances to zero on the general ledger. Temporary accounts are used to record accounting activity during a specific period. All revenue and expense accounts must end with a zero balance because they are reported in defined periods and are not allowed to carried over into the future.

Permanent accounts, on the other hand, track activities that extend beyond the current accounting period. They are placed on the balance sheet, a section of financial statements that gives investors an indication of a company’s value, including what assets and liabilities it has. As part of the closing entry process, the net income earned by the company is moved into retained earnings on the balance sheet.

How to record a closing entry:

1. First, all revenue accounts are transferred to income summary. This is done through passing a journal entry debiting all revenue accounts and crediting income summary.
2. Next, all expense accounts are transferred to income summary. This is done through passing a journal entry debiting income summary and crediting all expense accounts.
3. Third, the income summary account is closed and credited to retained earnings.
4. Finally, if a dividend is paid out the balance is transferred from the dividends account to retained earnings.

Explanation of Classified Balance Sheet:

A classified balance sheet is a financial statement with classifications like current assets and liabilities, long-term liabilities and other things. By organizing the information into categories, it can be easier to read and extract the information you need than if it was simply listed in a large number of line items. It also gives users more information about the company and its operations. For example, investors and creditors can use measurements like the current ratio to assess a company's solvency and leverage by comparing current assets and liabilities. Categorizing the balance sheet into current and long-term categories allows those to be easily accomplished.

Some of the most common classifications that are included in a balance sheet are:

a) Current assets

b) Long-term investments

c) Fixed assets (property, plant and equipment)

d) Intangible assets

e) Current liabilities

f) Long-term liabilities

g) Shareholders' equity

h) Other assets