Which of the following statements is true of adjusting journal entries (AJEs)? Group of answer choices
A AJEs always impact one income statement account and one balance sheet account
B AJEs always impact cash
C AJEs never impact the income statement
D AJEs never impact the balance sheet
The correct answer and explanation is:
The correct answer is A: AJEs always impact one income statement account and one balance sheet account.
Explanation:
Adjusting journal entries (AJEs) are accounting entries made at the end of an accounting period to update the records in accordance with the accrual basis of accounting. These entries are necessary to ensure that revenues and expenses are recorded in the period in which they occur, rather than when cash is received or paid. As a result, AJEs often affect both the income statement and the balance sheet.
Here’s a breakdown of why A is correct:
- Impact on Income Statement: Adjusting entries typically involve revenue or expense accounts. For example, if an expense (like accrued wages) has been incurred but not yet recorded, an adjusting entry will debit the expense account (income statement) and credit a liability account (balance sheet). Similarly, if a company earns revenue that hasn’t been recognized yet, an adjusting entry will credit a revenue account (income statement) and debit an asset account (such as accounts receivable) on the balance sheet.
- Impact on Balance Sheet: Adjustments also affect balance sheet accounts. This is because AJEs often deal with timing differences in the recognition of revenues and expenses. For instance, when a company earns interest income but has not yet received the payment, an adjusting entry will recognize the income in the income statement while simultaneously recording an increase in the asset (accounts receivable) on the balance sheet.
Why the other options are incorrect:
- B: AJEs always impact cash: AJEs do not necessarily impact cash. They are often used for non-cash transactions such as depreciation, accrued expenses, or earned but uncollected revenues.
- C: AJEs never impact the income statement: This statement is false because adjusting entries often involve income statement accounts like revenues or expenses.
- D: AJEs never impact the balance sheet: This is incorrect because adjusting journal entries always impact either a balance sheet account or an income statement account, or both.
In summary, the correct answer is A, as AJEs typically involve both income statement and balance sheet accounts to ensure accurate financial reporting based on the accrual accounting method.