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Case 3-77 Effect of Adjusting Entries on Financial Statements (A Conceptual Approach)
Don Berthrong, the manager of the local Books-A-Million, is wondering how adjusting entries will affect his financial statements. Don’s business has grown steadily for several years, and Don expects it to continue to grow for the next several years at a rate of 5 to 10% per year. Nearly all of Don’s sales are for cash. Other than cost Of goods sold, which is not affected by adjusting entries, most of Don’s expenses are for items that require cash outflows (e.g., rent on the building, wages, utilities, and insurance).
Required:
Would Don’s financial statement be affected significantly by adjusting entries?
Concept Introduction:
Adjusting entries are required to adjust the accounts according to the accrual basis of accounting at the end of the every accounting period. For example: Recording the depreciation expense on depreciable assets at the end of each accounting year.
The business activity for each type of adjusting entry is explained as follows:
- Accrued revenue: The adjusting entry for Accrued revenue is prepared to record the revenue earned during the period.
- Accrued Expense: The adjusting entry for Accrued expense is prepared to record the expenses incurred during the period.
- Deferred Revenue: The adjusting entry for Deferred revenue is prepared to defer the revenue that belong to next period.
- Deferred expenses: The adjusting entry for Deferred expense is prepared to defer the expense that belong to next period.
- Depreciation: The adjusting entry for depreciation expense is prepared to record the depreciation expense that belong to current period.
To Indicate:
If Don’s financial statements would be significantly affected by the adjusting entries.
Don’s financial statements would not be significantly affected by the adjusting entries because most of its t...
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