Answer:
1. I do not agree with the owner that expenses not paid for in March should not be accrued in March but recorded in April or May when actual payment is made. Such practise violates the accrual concept and matching principle of accounting. They require expenses to be matched to the period's income.
The adjusting entry needed to record the expenses is accrual adjustment, which requires the expense account to be debited and the expense payable account credited as a liability (unpaid financail obligation).
2. If the adjustment is not made, the particular expense account will be understated. This will also result in the overstatement of the net income.
The adjustment affects the Income Statement and the Balance Sheet. The income statement is affected because it is there that expenses are deducted from the gross profit to arrive at income before tax. The carryover effect is that the Retained Earnings, which adjust the net income after tax is also overstated.
Explanation:
Adjusting entries are journal entries used to recognize income or expenses that occurred but are not accurately displayed in the records. Adjusting journal entries are created at the end of an accounting period to balance debits and credits and match expenses to the income for the period in accordance with the accrual concept and matching principle of generally accepted accounting principles.
