Recording Transactions and Journal Entries: Adjusting and Closing
This domain tests journalizing, posting, the trial balance, adjusting entries, and closing entries. Marks are lost on direction (debit versus credit), on timing (period-end adjustment), and on VAT treatment.
Core rules
- Normal balances: assets and expenses are debit balances; liabilities, equity, and revenue are credit balances.
- Adjusting entries cover accruals (accrued revenue and expense), deferrals (prepaid expense and unearned revenue), estimates (depreciation, bad debt, warranty), and inventory.
- Closing entries zero temporary accounts (revenue, expense, drawings) into retained earnings; permanent accounts carry forward.
- A trial balance proves debit-credit equality only; it does not prove the entries are correct.
Worked example
On 1 April a company pays ₩12,000,000 for 12 months of insurance and records it as Prepaid insurance. Year-end is 31 December. The expired portion is 9 months at ₩1,000,000, or ₩9,000,000. The adjusting entry debits Insurance expense 9,000,000 and credits Prepaid insurance 9,000,000. The remaining asset of ₩3,000,000 covers January to March. If the original payment had been expensed immediately, the adjustment reverses: debit Prepaid insurance 3,000,000 and credit Insurance expense 3,000,000.
Traps
- Expensing the whole insurance payment on the payment date.
- Omitting accrued wages or accrued interest at year-end.
- Debiting input VAT to expense, or crediting output VAT to sales.
- Recording a credit sale as cash, or posting to the wrong subsidiary ledger so the control account disagrees.