Describe the following adjusting entries: accounts receivable (accrued revenues) and accounts payable (accrued expenses). Explain the...

Describe the following adjusting entries: accounts receivable (accrued revenues) and accounts payable (accrued expenses). Explain the consequences to the balance sheet and the income statement if each of these adjusting entries is not recorded at the end of the period.

Expert Solution

* In the accrual accounting system, income and expenses are to be recorded for a period to which they belong whether or not they are actually received or paid in cash.

* Hence, there arise a need to paas adjusting adjusting entries.

* For example, on 31 Dec, $2000 is billed for providing services. Now, the service receiver will pay in jan or Feb, but $2000 is the income of Dec. Hence, an adjustment entry is passed to recognise such revenue by crediting Revenue account and debbiting accounts receivables.

* Same goes for accounts payable and accrued expense.

----The consequences if such adjustment entry is not passed.

* Accounts recevables (Accruedd revenue): The consequences in the Income sattement will be that the Net Income (Revenues) will be understated by the amount of adjustment that should have been passes. In the balance sheet, The bbalance in retained Earnings will hence also be understated. On the Asset side, the balance is Accounts receivables will also be understated.

* Accounts payables (accrued expense): The consequences in the Income sattement will be that the Net Income (Revenues) will be overstated by the amount of adjustment that should have been passes, because expenses are not recorded that should have been recorded. In the balance sheet, The balance in retained Earnings will hence also be overstated. On the Liabilities side, the balance is Accounts payables will also be overstated.

ekkarill92 answered 1 year ago

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