Will an adjusting entry to accrue an incurred expense will affect total liabilities?
Sophia Koch
Updated on December 28, 2025
An adjusting entry to accrue an incurred expense will affect total liabilities. The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and deferred revenue has never been recorded.
What is the adjusting entry for that portion of revenue received in advance which has now been earned?
If they will be earned within one year, they should be listed as a current liability. When a company receives money in advance of earning it, the accounting entry is a debit to the asset Cash for the amount received and a credit to the liability account such as Customer Advances or Unearned Revenues.
Why do companies make adjusting entries?
The purpose of adjusting entries is to convert cash transactions into the accrual accounting method. Accrual accounting is based on the revenue recognition principle that seeks to recognize revenue in the period in which it was earned, rather than the period in which cash is received.
What is the adjusting entry for unearned income if the income method is used?
Unearned revenue is a liability for the recipient of the payment, so the initial entry is a debit to the cash account and a credit to the unearned revenue account.
What happens if you don’t do adjusting entries?
If the adjusting entry is not made, assets, owner’s equity, and net income will be overstated, and expenses will be understated. Failure to do so will result in net income and owner’s equity being overstated, and expenses and liabilities being understated.
How do adjusting entries affect net income?
Impact on the Income Statement Adjusting entries aim to match the recognition of revenues with the recognition of the expenses used to generate them. A company’s net income will increase when revenues are accrued or when expenses are deferred and decrease when revenues are deferred or when expenses are accrued.
What will be the effect in net income if no adjusting entry is prepared on accrued income?
If the adjusting entry is not made, assets, owner’s equity, and net income will be overstated, and expenses will be understated. Since the expense has not been paid but services have been received, an accrued expense and a liability have taken place.
Which of the following is considered an unearned income?
Unearned Income. Unearned income includes investment-type income such as taxable interest, ordinary dividends, and capital gain distributions. It also includes unemployment compensation, taxable social security benefits, pensions, annuities, cancellation of debt, and distributions of unearned income from a trust.
What will be the effect in net income if no adjusting entries are prepared on prepaid expense?
If prepaid expenses are not adjusted, they will be overstated and the expenses actually incurred understated. A misrepresentation of prepaid expenses and incurred expenses will have an impact on both the balance sheet and the income statement.
