The following explanation on a basic accounting concept comes to us courtesy of one of the best CPAs in North Fresno, California. According to the CPA firm we talked to in North Fresno, revenues must be assigned to the period in which they are earned and expenses must be assigned to the accounting period in which they were used to produce revenue under the matching principle.
In order to apply the matching rule, adjusting entries are required at the end of an accounting period. These entries are used to apportion income and expenses between two or more accounting periods and make life easier on CPAs in general. They are also used to record expenses incurred but not paid for the period, and to record revenues earned but not yet received.
After the accounts have been adjusted, closing entries transfer revenue, expense, and owners withdrawal balances from their respective accounts to the owner's capital account.
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