Question

You are a tut for introductory financial accounting. You tell your students "Recording adjusting entries is a critical step in the accounting cycle, and the two major classifications of adjusting entries are prepayments and accruals". Chris, one of the students in the class, says, "I don't understand".

5. What is the effect on (a) net income (b) assets (c) liabilities (d) stockholders' equity of not recording a required adjusting entry for accruals? For
     each item, clearly indicate whether the effect will be an Increase, a Decrease, or No Effect. Please present your answers using the template

Item Effect	Increase	Decrease	No Effect
Net Income
Assets
Liabilites
Stockholders' Equity

Answer 1

The adjusting entry for accrued expenses includes a debit to an expense and a credit to a liability. The adjusting entry for accrued revenues includes a debit to an asset and a credit to a revenue. By not recording an adjusting entry for an accrued expense, expenses will be understated and liabilities will be understated. By not recording an adjusting entry for an accrued revenue, assets will be understated and revenues will be understated.