Question

Which of the following account types is directly affected by a Type 3 adjusting entry?

a) Asset
b) Liability
c) Owners' Equity
d) Revenue
e) Expense
f) Dividend

Answer 1

A Type 3 adjusting entry affects an expense account by recording expenses incurred but not yet paid or recorded, adhering to the matching principle.

Step-by-step explanation:

The type of account that is directly affected by a Type 3 adjusting entry is an expense account. Type 3 adjusting entries are typically accrual adjustments for expenses that have been incurred but are not yet recorded in the accounts at the end of the accounting period. For instance, a company may have used utilities in December which will not be billed until January. To reflect this expense in the December accounts, an adjusting entry will increase (debit) the Utilities Expense account and increase (credit) the Accrued Expenses (or Utilities Payable) account. This ensures that financial statements reflect expenses in the period in which they are incurred, thereby adhering to the matching principle of accounting.

Dividend accounts, on the other hand, are not affected by Type 3 adjusting entries because dividends are distribution of earnings, not expenses.