Question

How does the adjusting entry to recognize the portion of the unearned revenue that a company earned during the accounting period affect the elements of the financial statements?

Answer 1

The adjusting entry to recognize the portion of the unearned revenue that a company earned during the accounting period affects the income statement, balance sheet, and indirectly the cash flow statement.

Step-by-step explanation:

The adjusting entry to recognize the portion of the unearned revenue that a company earned during the accounting period affects the elements of the financial statements in the following ways:

1. Income Statement: The adjustment recognizes the revenue that was earned, which increases the company's revenue and net income. This is reflected as a credit to the Unearned Revenue account and a debit to the Revenue account.
2. Balance Sheet: The adjustment reduces the liability in the Unearned Revenue account, which is reflected as a debit to the Unearned Revenue account. It also increases the Retained Earnings or Stockholders' Equity, as the company has earned revenue that now belongs to the shareholders.
3. Cash Flow Statement: There is no direct impact on the cash flow statement as it only reflects actual cash flows. However, the adjustment indirectly affects the cash flow statement by impacting the net income, which is a component of the operating activities section.