Adjusting Entries Affect At Least One What?

Are Adjusting Entries Affect Only Real Accounts Or Nominal Accounts?

Adjusting Entries affect at least one Income Statement Account and one Balance Sheet Account. Income statement accounts include both revenues and expenses while balance sheet accounts consist of assets and liabilities.

Adjusting Entries always affect revenues and expenses i.e., to match revenues with relevant expenses incurred in producing these revenues, and assets and liabilities to update balances of these types of permanent accounts.

There are basically two types of adjusting entries i.e., Deferrals And Accruals. Deferrals are related with Prepaid Expenses and Unearned Revenues while Accruals are concerned with Accrued Expenses and Accrued Revenues.

Example: Rent Expenses Paid in advance of Rs. 5000 for 5 months (Rs. 1000 paid for each month) on 1^st December, 2020, (Accounting Period Ended On 31^st December) is an example of prepaid expense, e.g., Prepaid Rent. We record the following adjusting entry at the end of the accounting period as shown below:

                                                   Rent Expense a/c  1000

 

                                                                                 Prepaid Rent a/c 1000

 

                                   (Adjustment Made For Rent Paid In Advance In December)

Rent expense of Rs. 1000 is recorded in Income Statement which is an income statement account. The remaining amount of prepaid rent i.e., 5000 - 1000 = Rs. 4000, will go the balance under Current Assets Section which is a balance sheet account.

So, we can say that adjusting entry affect at least one income statement account (revenue or expense )and one balance sheet account (asset or liability).