Question

1. Do adjusting entries affect the income statement? Explain.

2. Do closing entries affect the income statement? Explain

3. Closing entries are required to close revenue and expense to retained earnings.  What other account needs to be closed out?

4. Name an asset that can never be affected by an adjusting entry, and explain why.

5.Why is revenue closed with a debit ?

Answer 1

1. Adjusting entries affect both income statement and balance sheet as every adjusting entry will have a dual effect either revenues or expenses and liability or equity. So adjusting entries affect income statement. Examples are expired prepaid insurance and revenues earned but not billed. 2. Closing entries will affect income statement as all revenues; expenses accounts of income statement are transferred to retained earnings hence closing balance of income statement will be made ZERO after every period end. 3. Closing accounts are passed to close all temporary accounts such as revenues and expenses. Closing entries also passed for closure of dividend to retained earnings account. 4. Fixed assets account will never affect by the adjusting entries as depreciation expenses being the adjusting entry is passed as a contract asset account called accumulated depreciation and not fixed assets. Hence fixed assets will never affect by adjusting entries. 5. Revenues accounts will generally have credit balances and while transfer of these temporary accounts to income statement in turn to retained earnings for making their balances ZERO or NIL, we need to debit the revenue accounts.