Is there a difference between adjusting entries and correcting entries?

Answer 1

Adjusting entries occur completed at the end of the accounting period, but before preparing the financial statements; so in order for a company's accounting financial statements and records to be up-to-date on the accrual basis of accounting.

To show an example, each day the company earns wages expense but the payroll relating to workers' wages for the last days of the month would not be entered in the accounting records until after the end of the accounting period. Also, we know that this company uses electricity each day but receives just one bill per month, perhaps on the 20th day of the month. The electricity expense for the last 10-15 days of the month must be put into the accounting records if the financial statements are going to show all of the expenses and the amounts owed for the up-to-date accounting period. There are more additional acclimating entries amounts that the company paid prior to amounts becoming expenses. For examples, the company perhaps paid its insurance premiums for a four month period prior to the start of the four month period. It is possible the company may have deferred the expense by recording the amount in the asset account Prepaid Insurance. During the accounting period some of those premiums expired (were used up) and need to appear as expense in the current accounting period and the asset balance reduced.

With closing entries they are dated as of the last day of the accounting period. However they are entered into the accounts after the financial statements have been prepared. Manly closing entries contain the income statement accounts. The closing entries will set the balances of all of the revenue accounts and the expense accounts to zero. This means that the revenue and expense accounts will start the new year with zero in the accounts, thus allowing the company to easily report the new year revenues and expenses. So we see that the net amount of all of the balances from expense and revenue accounts at the end of the year will be in retained earnings (for corporations) or owner's equity (for sole proprietorships).