Home > Topics > Foundation – Paper 1 – Accounting > Journal Entries - Part 2 (Opening, Closing & Adjusting Entries)
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Journal Entries - Part 2

"Beyond simple transactions - opening, closing, and adjustments."

In Part 1, we learned basic journal entries. Now we'll cover special types of entries that complete the accounting cycle.

Types of Special Entries

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1. Opening Entries

When: At the start of a new accounting period.

Purpose: Transfer balances from previous year's Balance Sheet to current year's books.

Rule:

  • Assets (Dr. balance) → Debit
  • Liabilities (Cr. balance) → Credit

Example: Opening Entry

Previous Year's Balance Sheet (Closing):

  • Cash: ₹50,000
  • Furniture: ₹30,000
  • Debtors: ₹20,000
  • Capital: ₹70,000
  • Creditors: ₹30,000

Opening Entry for New Year:

Cash A/c                        Dr.    ₹50,000
Furniture A/c                   Dr.    ₹30,000
Debtors A/c                     Dr.    ₹20,000
    To Capital A/c                         ₹70,000
    To Creditors A/c                       ₹30,000
(Being opening balances brought forward from previous year)

2. Closing Entries

When: At the end of the accounting period.

Purpose: Transfer nominal account balances (revenues and expenses) to Trading & Profit & Loss Account.

Steps for Closing

Step 1: Close all revenue accounts to Trading/P&L Step 2: Close all expense accounts to Trading/P&L Step 3: Transfer final profit/loss to Capital Account

Example: Closing Entries

Accounts to close:

  • Sales: ₹3,00,000 (Cr.)
  • Purchases: ₹2,00,000 (Dr.)
  • Salary: ₹30,000 (Dr.)
  • Rent: ₹20,000 (Dr.)

Closing Entries:

Entry 1: Close Revenue

Sales A/c                       Dr.    ₹3,00,000
    To Trading A/c                         ₹3,00,000

Entry 2: Close Expenses

Trading A/c                     Dr.    ₹2,00,000
    To Purchases A/c                       ₹2,00,000

Profit & Loss A/c               Dr.    ₹50,000
    To Salary A/c                          ₹30,000
    To Rent A/c                            ₹20,000

Entry 3: Transfer Net Profit

Profit & Loss A/c               Dr.    ₹50,000
    To Capital A/c                         ₹50,000
(Being net profit transferred to capital)

3. Adjusting Entries

Purpose: Record transactions that have occurred but not yet been recorded, or correct accounting to match the Accrual Basis.

Types of Adjustments

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a) Outstanding Expenses

Situation: Salary for December ₹20,000 will be paid in January.

Adjusting Entry (31st Dec):

Salary A/c                      Dr.    ₹20,000
    To Outstanding Salary A/c              ₹20,000
(Being salary for December outstanding)

Effect:

  • P&L shows full year's salary expense
  • Balance Sheet shows Outstanding Salary as liability

b) Prepaid Expenses

Situation: Paid annual insurance ₹12,000 on 1st October (covers Oct-Sep next year). Year ends 31st March.

Calculation: 6 months (Apr-Sep) are for next year = ₹6,000

Adjusting Entry (31st March):

Prepaid Insurance A/c           Dr.    ₹6,000
    To Insurance A/c                       ₹6,000
(Being insurance prepaid for 6 months)

Effect:

  • P&L shows only ₹6,000 expense (current year)
  • Balance Sheet shows ₹6,000 prepaid as asset

c) Accrued Income

Situation: Interest on FD ₹5,000 earned but bank hasn't credited yet.

Adjusting Entry:

Accrued Interest A/c            Dr.    ₹5,000
    To Interest Income A/c                 ₹5,000
(Being interest accrued but not received)

d) Depreciation

Situation: Machinery cost ₹1,00,000, depreciation @ 10%.

Adjusting Entry:

Depreciation A/c                Dr.    ₹10,000
    To Machinery A/c                       ₹10,000
(Being depreciation charged on machinery)

4. Compound Journal Entries

Definition: An entry with more than one debit or more than one credit (but total Dr. = total Cr.).

Example 1: Multiple Debits

Transaction: Purchased furniture ₹20,000 and machinery ₹30,000, paid cash.

Furniture A/c                   Dr.    ₹20,000
Machinery A/c                   Dr.    ₹30,000
    To Cash A/c                            ₹50,000
(Being furniture and machinery purchased for cash)

Example 2: Multiple Credits

Transaction: Sold goods to Ram ₹10,000 and Shyam ₹15,000 on credit.

Ram A/c                         Dr.    ₹10,000
Shyam A/c                       Dr.    ₹15,000
    To Sales A/c                           ₹25,000
(Being goods sold on credit)

Real-World Application

Flipkart - Year-End Adjustments

  • Outstanding Expenses: Vendor payments pending ₹500 Crores
  • Prepaid Expenses: AWS cloud services paid for next 6 months ₹100 Crores
  • Accrued Income: Advertising revenue earned ₹50 Crores (payment pending)
  • Depreciation: Warehouses, servers, equipment ₹200 Crores

All these adjustments ensure Flipkart's financial statements reflect true and fair view of its performance.

Quiz: Journal Entries Part 2

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