Question

Adjusting entries:

a Affect cash accounts.
b Affect both income statement and balance sheet accounts.
c Affect only income statement accounts.
d Affect only equity accounts.
e Affect only balance sheet accounts.

Answer 1

Adjusting entries b) affect both income statement and balance sheet accounts, ensuring financial statements accurately reflect a company's financial position and performance within a specific accounting period, without affecting cash accounts.

Step-by-step explanation:

Adjusting entries are crucial in the accounting process, specifically when it comes to preparing financial statements. They ensure that incomes are recorded in the period they are earned and expenses are recorded in the period they are incurred, following the accrual basis of accounting. The correct answer is that adjusting entries affect both income statement and balance sheet accounts. They are used to update the accounts for things that have not yet been recorded under the accruals basis - for example, expenses that have been incurred but not yet paid, or revenue that has been earned but not yet received in cash.

Adjusting entries do not typically affect cash accounts, as these are usually updated when cash transactions occur. Adjusting entries ensure that the financial statements reflect a company's financial position and performance for the period accurately. For instance, if a company earns interest income, that income will affect its net worth, indicated in the equity accounts, even though it might not yet have been received in cash.