Question

If you did not record adjusting entry for accruals, what would be the impact on the financial statement of the company?

Answer 1

Adjusting entry for accruals is adjusting entry that are prepared at the end of an accounting period financial statements of the business will comply with the accrual method or concept of accounting.

We know that some transactions that occurred during the current accounting period but have not yet been recorded in the books of business as their payment is paid/received after closing the books. These transactions are reported in a later accounting period. It means that the financial statements for two accounting periods will be reporting incorrect amounts due to adjusting entry for accruals. for example-

Assuming that a business takes work from labours in December 2020 for $10,000 and paid only $7,000 out of $10,000 and a liability of $3,000 is due which is to be paid in January 2021.

Without an accrual adjusting entry as of December 31, financial statements for this wages will be affected as follows (impact on the financial statement of the company)-

• Its December income statement will report $0 for accrued wages expense, and the profit of December will be increased by $3,000. (which is wrong)
• January income statement will report $3,000 in wages expense that was actually incurred in December 2020, and the profit of January will be decreased by $3,000. (which is wrong)
• Its December 31 balance sheet will not be reporting its $3,000 liability as accrued wages (which is wrong)

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