Final answer:
Adjusting for supplies expense affects both the Balance Sheet and the Income Statement by decreasing assets and equity, while increasing expenses, which leads to a decrease in net income. Liabilities and revenues remain unchanged. The Statement of Cash Flows is not affected by this adjustment as it does not involve cash movement.
Step-by-step explanation:
The question relates to how adjusting accounts to recognize supplies expense affects a company's financial statements. Adjusting for supplies expense decreases assets (supplies) and increases expenses on the income statement, which decreases net income. The effect can be seen in the following accounting equation for the Balance Sheet and the Income Statement:
- Assets decrease because the supplies have been used up (expense recognized).
- Liabilities remain unchanged as this transaction does not involve any liability.
- Equity decreases due to the reduction in net income caused by the increased expense.
- Revenues remain unchanged as this adjustment does not involve revenue.
- Expenses increase because the cost of supplies is recognized as an expense.
- Net Income decreases as expenses increase, reducing profitability.
The correct choice with the adjustments in the financial statements would therefore be:
Balance Sheet: Assets = Liab. + Equity (- NA NA)
Income Statement: Rev. − Exp. = Net Inc. (- NA +)
Statement of Cash Flows: This transaction would not typically appear on the Statement of Cash Flows because it does not involve cash movement; it is an adjustment of inventory to expense.