Adjusting entry vs closing entry
Each, defined
Adjusting entry
Adjusting entry — A close entry to apply accrual accounting.
Closing entry
Closing entry — The year-end entry that zeroes every temporary account — revenue, expense, gains, losses, dividends or drawings — into retained earnings, so the new year's P&L starts at nil. Most ledger software performs it virtually.
Side by side
| Adjusting entry | Closing entry | |
|---|---|---|
| When | Every period-end | Fiscal year-end |
| Purpose | Recognize revenue and expense in the right period | Reset temporary accounts |
| Changes net income | Yes | No |
| Accounts touched | Balance sheet and P&L | P&L accounts and retained earnings |
The balances the closing entry takes to zero
Northwind Traders, Inc.'s September 2026: three adjusting entries bring the trial balance up to date — insurance used, depreciation, unbilled utilities — and the closing entry then takes all 7 revenue and expense balances to retained earnings.
| Account | Debit | Credit |
|---|---|---|
| Revenue | 31,500.00 | |
| Cost of revenue | 17,000.00 | |
| Payroll expense | 8,400.00 | |
| Rent expense | 2,000.00 | |
| Insurance expense | 600.00 | |
| Depreciation expense | 500.00 | |
| Utilities expense | 450.00 |
How they relate
Adjusting entries change what the statements say: they recognize accruals, release prepaids and record depreciation. Closing entries change nothing on the statements; they reset the temporary accounts for the next year.
Adjustments come first, every month. The close comes after the last adjustment of the year, and most software performs it implicitly.
Questions
- How often are adjusting entries made?
- Monthly, at every close.
- Do closing entries affect net income?
- No. They only move balances inside equity.
See it computed
Worked through: the calculators, the journal entries and the tools that use these terms.
- Journal entry for closing entriesAt the end of the fiscal year, debit every revenue account for its credit balance, credit every expense account for its debit balance, and take the difference — net income — to Retained earnings. Revenue and expense accounts start the new year at zero.Entry
- Journal entry for depreciationEach period, debit Depreciation expense and credit Accumulated depreciation for the period's charge. The asset account keeps its original cost; accumulated depreciation, a contra-asset, grows until net book value reaches salvage value.Entry
- Journal entry for accrued expensesAt month-end, debit the expense and credit Accrued expenses for work received but not yet billed. Reverse the accrual on the first day of the next month, then book the vendor's bill as usual when it arrives.Entry
Definitions are the glossary’s, generated from the same documents. Figures in the examples are computed by tested functions, not typed. General information for US companies under US GAAP, not accounting or tax advice.