Question

We have learned about four types of adjustments: (1) prepaid expenses, (2) unearned revenues, (3) accrued revenues, and (4) accrued expenses. With those concepts in mind, review the following scenario, As the book-keeper for your company you are required to create quarterly financial statements (Income Statement, Statement of Owner's Equity Balance Sheet and Statement of Cash Flows) in order to report on the financial activities of the company for the quarter (three months). It is now March 29th, and in preparation for creating the 1st quarter's financial statements (as of 3/31), you have called a meeting with the Dept. Managers for Accounts Receivable and Accounts Payable to confirm deadlines that have to be met for recording March-related transactions. As the meeting starts the owner walks in - she sits quietly as you explain the deadlines, but as soon as you have finished she says "Well, for this quarter, if we have not paid March invoices by March 31, there is no need to record them in March. We can record/expense those invoices when we pay them in April or May." Required:

1. Do you agree with the owner, or, do you feel that an adjusting entry is necessary in the situation described? If so - which type of adjusting entry is needed?
2. Why is the adjustment necessary? (Refer to concepts in the chapter) In your post:
a) discuss the impact (understated or overstated) on the accounts affected if the adjustment is not made, and
b) explain how the adjustment affects the appropriate financial statements
3, Assume one of the unpaid invoices is for $2,000 in Advertising. Show the type of adjusting entry you would create.

Answer 1

1. Do you agree with the owner, or, do you feel that an adjusting entry is necessary in the situation described? If so - which type of adjusting entry is needed?

• She is wrong, because the accrual principle states that both revenues and expenses must be recognized during the periods that they actually occur, not when they are collected or paid for.

2. Why is the adjustment necessary? (Refer to concepts in the chapter) In your post:

• If you do not record accrued expenses, then you are understating first quarter expenses and overstating second quarter expenses.

a) discuss the impact (understated or overstated) on the accounts affected if the adjustment is not made, and

• March invoices represent costs and expenses associated to the activities carried out during March, and not recording them properly will result in net income being over stated during March (first quarter)and under stated during the second quarter.

b) explain how the adjustment affects the appropriate financial statements

• First quarter's net income will be over stated while second quarter's net income will be under stated.

3, Assume one of the unpaid invoices is for $2,000 in Advertising. Show the type of adjusting entry you would create.

Dr Advertising expense 2,000

Cr Accounts payable 2,000

Step-by-step explanation: