Question

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.

Answer 1

Adjusting entry for accruals would be for example "Salaries expenses accrued" for the period for an amount of 100,000 would be accounted as:

Salaries expense Account Debit 100,000
Salaries Payable account Credit 100,000

a) This would decrease the net income as expenses will increase and profits will go down.
b) This accrual entry will have no impact on assets as the above journal does not impact the asset account.
c) Liabilities will increase as we have taken a liability in form of Salaries payable.
d) Stockholder's equity will decrease as the amount of net income is decreased.

Another example of accrual in form of service revenue which is accrued but not accounted for say 50,000 would be accounted as:

Accrued revenue account Debit 50,000
Service Revenue account Credit 50,000

a) This would increase the net income as service revenue account will increase.
b) Asset balances will increase with recognition of accrued revenue receivable account.
c) This accrual entry will have no impact on liabilities as the above journal does not impact the liability account.
d) Stockholder's equity will increase as the amount of net income is increased.