Question

Adjusting entries typically involve which transactions:

Those necessary to close the temporary accounts to the Retained Earnings account
O Those dealing with the Cash account
Those that occur continually over a period of time
Those that involve calculation errors or misapplication of accounting rules
O Those between the company and its stockholders.

Answer 1

Adjusting entries typically involve those transactions that occur continually over a period of time, such as the accrual of interest on a loan or the depreciation of fixed assets. These types of transactions are recorded in temporary accounts, such as the Accrued Expenses or Depreciation Expense accounts, and must be closed to the Retained Earnings account at the end of the accounting period in order to prepare the financial statements. Adjusting entries may also involve correcting calculation errors or misapplication of accounting rules. However, they do not typically involve transactions involving the Cash account or those between the company and its stockholders.