Question

Of the six typical adjusting journal entries found in chapter three and described in a previous discussion, which of the six is likely to have the largest financial impact of a company's income statement? When we look a major corporation like Disney, General Motors or Federal Express, one of the AJES (adjusting journal entries) will have financial impact likely in the hundreds of million dollars. Which of the six is likely to have the largest financial impact of a company's income statement, and of course, please explain why? 1. Accrued Revenues (and the related receivables) have been earned, but the sales invoices have not yet been processed. revenues 2. Accrued Expenses (and the related payables) have been incurred, but the vendors' invoices have not been completely processed Money was received in advance of having been earned expenses 3. Deferred revenues Money was paid for a future expense 4. Deferred expenses 5. Depreciation An asset was purchased in one period, but its cost must be allocated to expense in each of the accounting periods of the asset's useful life. expense

Answer 1

In my view The adjustment entry 5 will make a great impact impact compared to all other adjustment entries on the financial statements of the organisation.

The adjustment entry 5 is regarding to depreciation expense of an asset in the organisation.

Explanation for the above given statement is as follows :-

Primary all the organisations categories available in the organisation into depreciable assets and non depreciable assets based on the cost of asset.

1. Adjustment entry of depreciation the asset is purchased in one year and by mistake the depreciation is charged in another year. This makes huge impact on the financial statements because how the depreciation is calculated as a percentage of the cost of asset.

2. Depreciation is calculated on the depreciable assets only. As an asset categorised into depreciable asset it refers to the cost of asset is more material to the organisation.

3. Hence the depreciation ( i.e calculated as a percentage of cost of asset ) is also material to the organisation.

4. Then if any mistakes or adjustments done to that depreciation expense it shows material or huge effect on the financial statements

5. As the value of depreciation can be high compared to the accrued revenues, accrued expenses, deffered revenues and deffered expenses.

Effects of depreciation adjustment in the financial statements as follows :-

Effect of adjustments in depreciation on income statement is increase or decrease in the profits in some exceptional cases by the effect of adjusting the depreciation expense profits can be turned into losses and losses can be turned into profits.

Effects of adjustments in depreciation expenses on balance sheet is

It effects the reserves and surplus and makes overvaluation of reserves and surplus for under valuation of reserve and surplus.

Not only reserve and surplus it also effects capital contribution by the equity shareholders for the entire section of equity in the balance sheet which includes equity capital preference capital or common stock and preferred stock.

So the adjustment of depreciation expense effects the the profit of the organisation the reserves and surplus of the organisation and equity section of the organisation.

But all other adjustments juice minor adjustments like adding notes to accounts are footnotes to the financial statements this minor amounts.

Conclusion :- adjustment entry regarding depreciation expense will impact more compared to all other adjustments to the financial statements.

These are all the information required to solve the given question.

I hope, all the above given information and explanations are useful and helpful to you.

Thank you.