Chapter 4, Problem 4.2.2AAP

To determine

Introduction: Each financial transaction or economic event will have an effect on either assets, liabilities or owners’ equity. Thus, the basis for recording these transactions in the accounting system depends on the accounting equation.

  $\text{Assets}\text{=}\text{Liabilities}\text{+}\text{Stockholder's}\text{Equity}$

Adjustments: Number of adjustment entries are required to be made at the end of a period for a company using the accrual basis of accounting. The adjustments are made for (1) payment of cash before the expense is incurred. (2) Receipt of cash in advance before service is provided. (3) Cash paid in advance as an expense before service is utilized. (4) Recognition of revenue before receipt of cash. (5) non-cash expense.

The effect on net income for the year if the adjustments are ignored.