Question

There are four categories of Adjusting Entries: Prepaid Expenses (including Depreciation), Unearned Revenue, Accrued Expenses, and Accrued Revenue. Within each of these categories, there are a lot of examples that we could show.

For this graded discussion, please choose one category of Adjusting Entries. Within that category, choose one example of an adjusting entry that you might make in a company.

1. Please describe why this adjusting entry needs to be made.
2. Please describe the accounts that are affected by making the adjusting entry.
3. Please describe the impact this adjusting entry has on the Income Statement and the Balance Sheet.
4. Which adjusting entry do you think will be most prone to error? It does not have to be the example you chose.

Answer 1

Okay, so I'm choosing "Accrued Expenses"

Example:

Wages outstanding at the end of the financial period.

1)

Generally, entities follow "Accrual Basis" of accounting, accordingly they charge, to their income statement, those expenses which are incurred during the period, regardless whether that has been discharged or not.

So, there is a need to create a liability for the amount which has been debited in the income statement, because sooner or later, the entity has to pay for this.

2)

Accounts affected :

a)

Accrued Wages A/c ( Cr.)

b)

Wages Expenses A/c (Dr.)

3)

By passing the adjusting entry, we reduce the net income and at the same time increases the balance of "Current Liabilities"

4)

In my opinion, "Unearned Revenue" creates confusion for most of the people. They mistakenly treat is as " Accrued Revenue", which makes their preparation of financial statement go wrong.