Question

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As the book-keeper for your company you are required to create quarterly financial statements (Income Statement, Statement of Owner's Equity Balance Sheet and Statement of Cash Flows) in order to report on the financial activities of the company for the quarter (three months). In your accounting classes you learned about four types of adjustments: (1) prepaid expenses, (2) unearned revenues, (3) accrued revenues, and (4) accrued expenses.

It is now March 29th, and in preparation for creating the 1st quarter's financial statements ( as of 3/31), you have called a meeting with the Dept. Managers for Accounts Receivable and Accounts Payable to confirm deadlines that have to be met for March-related transactions. As the meeting is about to start the owner walks in - she sits quietly as you explain the deadlines, but as soon as you have finished she says "Well, for this quarter, if we have not paid March invoices by March 31, there is no need to record them in March. We can record/expense those invoices when we pay them in April or May."

Required:

Do you agree with the owner, or, do you feel that an adjusting entry is necessary in the situation described? If so - which type of adjusting entry is needed?

Why is the adjustment necessary? (Refer to concepts in the chapter) In your post:

a) discuss the impact (understated or overstated) on the accounts affected if the adjustment is not made, and

b) explain how the adjustment affects the appropriate financial statements

3, Assume one of the unpaid invoices is for $2,000 in Advertising. Show the type of adjusting entry you would create.

Answer 1

Requirement 1
		No, We do not agree with owner and strongly feel that ajusting entry is necessary in the situation described.
		Following type of adjustment entry is usually needed at the year end
		1	Unearned Revenue
		2	Accrued Revenue
		3	Prepaid expenses
		4	Accrued expenses
Requiement 2		The impact on accounts
	a			Revenue	Expense	Net Income	Asset	Liabilities	Equity
		1	Unearned Revenue	Understated		Understated		Overstated	Understated
		2	Accrued Revenue	Understated		Understated	Understated		Understated
		3	Prepaid expenses		Understated	Overstated	Overstated		Overstated
		4	Accrued expenses		Understated	Overstated		Understated	Overstated
	b	The adjustment affects the appropriate financial statement. As one of the fundamental Principle of Generally accepted accounting practices known as
		"Accrual" is not followed, it will distort the entire financial statement and very purpose of preparing it.
Requirement 3
	Date	Account Title & Explanation		Debit	Credit
				Amount in $	Amount in $
	XXXXXX	Advertsing expense		2000
			Advertsing expense payable		2000
		To record the outstanding/unpaid advertising expense