Question

What is the purpose of making adjusting entries? Your answer should relate adjusting entries to the goals of accrual accounting.

Do adjusting entries affect income statement accounts, balance sheet accounts, or both? Explain.

Answer 1

The Purpose of making adjusting entries are to achieve the objective of accrual accoutning System.
Accrual accounting states that the revenue and expenses are to be recognized as and when they are earned or incurred repectively.
So the main purpose is to make the accounts so that they conform with the accrual acconting syatem and provides and True & Fair view
of account throughout the year.
Yes adjusting entires do affect both the Income Statements and Balance sheet.
Let us take an example of Depreciation on Equipment which is an adjusting entry.
Depreciation expense is a non-cash item but still it is recorded as an expense in the Income Statement and hence the Net Income decreases.
The counter effect of this entry goes to Equipment account which decreases by the same amount each year.
So every adjusting entries effect both the Income Statement and Balance sheet.