Each adjusting entry will always affect:
Only income statement accounts
Only balance sheet accounts
At least one income statement account and one retained earnings statement account
At least one balance sheet account and one income statement account
The correct answer and explanation is :
Correct Answer:
At least one balance sheet account and one income statement account
Explanation:
Adjusting entries are essential in accounting because they ensure that financial statements accurately reflect a company’s financial position and performance according to the accrual basis of accounting. These entries are made at the end of an accounting period before preparing financial statements.
Each adjusting entry affects:
- One Income Statement Account (Revenue or Expense)
- Adjusting entries record revenue when it is earned (not necessarily when cash is received) and expenses when they are incurred (not necessarily when cash is paid).
- For example, if a company provides services in December but will receive payment in January, an adjusting entry ensures that revenue is recorded in December, following the revenue recognition principle.
- One Balance Sheet Account (Asset or Liability)
- Adjustments are made to assets (such as prepaid expenses and accounts receivable) and liabilities (such as unearned revenue and accrued expenses).
- For instance, if a business pays rent in advance, initially recorded as Prepaid Rent (Asset), an adjusting entry will decrease Prepaid Rent and record Rent Expense to match the cost with the correct accounting period.
Types of Adjusting Entries:
- Accrued Revenues: Revenue earned but not yet received (e.g., interest income).
- Accrued Expenses: Expenses incurred but not yet paid (e.g., salaries payable).
- Deferred Revenues: Cash received before earning revenue (e.g., unearned service revenue).
- Deferred Expenses: Prepaid expenses that must be recognized as costs over time (e.g., prepaid insurance).
- Depreciation Adjustments: Allocating the cost of a fixed asset over its useful life.
Since each adjusting entry always involves both a balance sheet and an income statement account, the correct answer is:
✅ At least one balance sheet account and one income statement account.
Now, I’ll generate an image illustrating adjusting entries.
Here is an image illustrating adjusting entries in accounting. It visually represents how adjusting entries affect both the income statement and the balance sheet, including categories like accrued revenues, accrued expenses, deferred revenues, and deferred expenses.