For example the adjusting entry relating to prepaid

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For example, the adjusting entry relating to Prepaid Insurance debits (increases) Insurance Expense and credits (decreases) Prepaid Insurance. Failing to make and post this adjusting entry will have the effect of understating Expenses (Insurance Expense) and, therefore, overstating Net Income. Prepaid Insurance would be overstated.On January 2, the company spent $67,200 to purchase equipment that will last 6 years. We will depreciate this equipment equally over that 6-year period as depreciation expense. $67,200 divided by 6 years is $11,200 depreciation expense per year. The adjusting entry would be: DateAccount TitleDebitCreditDec.31Depreciation Expense11,200Accumulated Depreciation11,200Income statement accounts: If the adjusting entry is ignored, Depreciation Expense will be understated. Revenues will not be involved.Net income: If Depreciation Expense is understated, then Net Income will be overstated. Balance sheet accounts: If the adjusting entry is ignored, assetswill be overstated because Accumulated Depreciation, a contra-asset, will be understated. Liabilitieswill have no effect. Owner's Equitywill be overstated (due to Depreciation Expense being understated, therefore causing Net Income to be overstated.) ANSWERIncome Statement AccountsRevenue:Expense:Net Income:Balance Sheet AccountsAssets:(Choose one)(Choose one)(Choose one)(Choose one)No EffectUnderstatedOverstatedOverstated
Liabilities:Owner's Equity:Richardson Company's employees earn $310 per day and are paid on Friday for a five-day work week. This year, December 31 is a Thursday. If the appropriate adjusting entryis not made at the end of the year, what will be the effect on: (a) Income statementaccounts (overstated, understated, or no effect)?(b) Net income(overstated, understated, or no effect)?(c) Balance sheetaccounts (overstated, understated, or no effect)?EXPLANATIONTo answer this question correctly, first write down the "appropriate adjusting entry." If you are not sure how to do that, review the dictionary link for adjusting entry.Each adjusting entry affects at least 2 accounts - an income statement account (revenue/expense) and a balance sheet account (asset/liability). If adjusting entries are not made, there will be overstatements and understatements in the financial statements.For example, the adjusting entry relating to Prepaid Insurance debits (increases) Insurance Expense and credits (decreases) Prepaid Insurance. Failing to make and post this adjusting entry will have the effect of understating Expenses (Insurance Expense) and, therefore, overstating Net Income. Prepaid Insurance would be overstated.Since December 31 falls on a Thursday, there are 4 days of salaries that must be recorded in the current year. We accrue those 4 days in an adjusting entry on December31. The adjusting entry will be: DateAccount TitleDebitCreditDec.31Salaries Expense1,240Salaries Payable1,240No EffectOverstated(Choose one)(Choose one)(Choose one)(Choose one)

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