Adjusting entries ensure that revenues and expenses are recorded in the appropriate accounting period according to the accrual basis of accounting.

Prepaid expenses, such as insurance or rent, require adjusting entries to allocate costs over time properly.

Closing entries transfer balances from temporary accounts (revenues, expenses, and dividends) to permanent equity accounts.

Permanent accounts such as assets, liabilities, and equity are not closed at the end of the period, unlike temporary accounts.

Closing entries impact the income statement by resetting temporary accounts and transferring net income to retained earnings.

An accrued expense adjusting entry records salaries or other expenses that have been incurred but not yet paid.