Question

An adjusting entry record June Salary expense that will be paid in June. Which statement best describes the effect of this adjusting entry on the company's accounting equation?

Answer 1

The adjusting entry for June's salary increases the salary expense and creates a corresponding liability, affecting the company's net income and liabilities.

Step-by-step explanation:

The adjusting entry for recording salary expense that will be paid in the same month affects the company's accounting equation by increasing expenses on the income statement, which decreases net income, and simultaneously increasing a liability on the balance sheet. Specifically, the entry will increase Salary Expense (an expense account on the income statement) and increase Salaries Payable (a liability account on the balance sheet). This is because the salary has been incurred but not yet paid, and the accounting equation (Assets = Liabilities + Owner's Equity) must remain balanced.

Answer 2

The adjusting entry for June Salary Expense increases the company's expenses, which decreases equity, but does not affect liabilities because the salaries will be paid in June. The accounting equation is impacted by a decrease in equity due to the recorded expense.

Step-by-step explanation:

The student's question involves recording an adjusting entry for a salary expense that was incurred in June but will be paid in June as well. In the context of the company's accounting equation, an adjusting entry for salaries will affect both the expenses and liabilities of the company. When the adjusting entry is made, the Salary Expense account (an expense account which is part of the equity side of the accounting equation) is debited to reflect the increase in expenses for the period. Simultaneously, a corresponding liability account, such as Accrued Salaries or Salaries Payable, is credited to reflect the obligation to pay this expense in the future. This effectively increases the company's expenses for the month, which decreases the total equity, and increases the company's liabilities. Since this entry is for salaries that will be paid in the same period they are incurred, generally there should be no change to liabilities but rather a reduction in cash when the payment is made. Therefore, in summary, the accounting equation (Assets = Liabilities + Equity) is impacted by a decrease in equity due to higher expenses and no change in liabilities if the payment is indeed made in June.