Types of Accounting Entries Explained with Balance Sheet & P&L
Day 25 – 50 Days Accounting Challenge by CA Devesh Thakur
Accounting is not about memorising journal entries; it is about understanding the flow of transactions from one financial year to another.
In Day 25 of the 50 Days Accounting Challenge, we focus on the most important conceptual area for Class 11 students — Types of Accounting Entries.
This blog explains how different entries are connected with:
- Opening Balance Sheet
- Profit & Loss Account
- Closing Balance Sheet
and how students should logically approach:
- Opening Entries
- Closing Entries
- Transfer Entries
- Adjustment Entries
- Rectification Entries
All concepts are explained with practical figures, financial statements, and clear cross-references.
1. Role of Balance Sheet in Accounting Entries
A Balance Sheet represents the financial position of a business at a particular date.
It becomes the starting point of the next accounting year.
Balance Sheet as at 31-03-2025 (Previous Year)
This Balance Sheet provides the opening balances for the next year.
Key Concept:
Assets and liabilities of the previous year become opening balances of the new year.
This is where Opening Entries originate.
2. Opening Entry – Concept and Purpose
What is an Opening Entry?
An Opening Entry is passed at the beginning of a new accounting year to bring assets and liabilities from the previous year into the books.
- Assets are debited
- Liabilities are credited
- Capital acts as the balancing figure
Why Opening Entry is Important?
- Without it, books cannot start correctly
- It links two accounting years
- It ensures continuity in accounting records
Important Exam Point
Opening Entry is passed only once, on the first day of the accounting year.
3. Profit & Loss Account and Its Link with Entries
During the year, various incomes and expenses are recorded.
At the end of the year, they are summarised in the Profit & Loss Account.
Profit & Loss Account (Year Ended 31-03-2026)
The P&L Account helps us calculate Net Profit or Net Loss.
- Income increases capital
- Expenses reduce income
- The difference is transferred to Capital Account
Key Concept
The Profit & Loss Account itself does not carry forward; only its result does.
4. Closing Entries – Meaning and Use
What are Closing Entries?
Closing Entries are passed at the end of the accounting year to:
- Close all income accounts
- Close all expense accounts
- Transfer their balances to the Profit & Loss Account
Why Closing Entries Are Required?
- To calculate net profit or loss
- To reset income and expense accounts to zero
- To prepare books for the next year
Exam Tip
Closing entries are passed only at year-end, never during the year.
5. Transfer Entry – Profit to Capital
After calculating net profit, it must be transferred to the owner’s account.
Transfer Entry Meaning
A Transfer Entry shifts the net profit (or loss) from the Profit & Loss Account to the Capital Account.
Why This Entry Is Passed?
- Profit belongs to the owner
- Capital increases due to profit
- It reflects the true financial position
Conceptual Flow
P&L Account → Capital Account → Balance Sheet
6. Adjustment Entry – Matching Concept Explained
What is an Adjustment Entry?
Adjustment Entries are passed to:
- Match income with the correct accounting period
- Match expenses with the year to which they belong
Common Adjustments
- Outstanding expenses
- Prepaid expenses
- Accrued income
- Income received in advance
Example Concept
If salary is unpaid at year-end:
- Expense must be recorded
- Liability must be created
Golden Rule
Adjustment entries ensure true profit and true financial position.
7. Rectification Entry – Correction of Errors
What is a Rectification Entry?
Rectification Entry is passed to correct accounting mistakes already recorded in the books.
Common Errors
- Wrong account debited or credited
- Expense recorded instead of asset
- Incorrect amount recorded
Example Concept
If furniture purchase is wrongly debited to expenses:
- Expense is reduced
- Asset is increased
Key Learning
Rectification does not change reality, it corrects recording.
8. Closing Balance Sheet (As at 31-03-2026)
After:
- Opening Entry
- Year-long transactions
- Adjustments
- Closing and Transfer Entries
the final outcome appears in the Closing Balance Sheet.
What Does the Closing Balance Sheet Show?
- Updated capital after profit
- Adjusted assets and liabilities
- Financial position at year-end
This Balance Sheet becomes the base for the next year’s opening entry.
9. Complete Logical Flow (Very Important for Students)
Previous Year Balance Sheet
→ Opening Entry
→ Daily Transactions
→ Adjustments
→ Profit & Loss Account
→ Closing Entries
→ Transfer Entry
→ New Balance Sheet
If this flow is clear, accounting automatically becomes easy.
Conclusion
Understanding Types of Accounting Entries is the backbone of accounting education.
This topic connects journals, ledger, Profit & Loss Account, and Balance Sheet into one logical system.
This blog completes Day 25 of the 50 Days Accounting Challenge by CA Devesh Thakur, designed to help Class 11 students move from rote learning to conceptual clarity.
