 Hello. In this discussion we will discuss the discussion question of explain how accounting adjustments affect financial statements and provide an example of an adjustment that would impact the statements if not recorded. So this is going to be the adjusting process and saying what the adjusting process is and why are we doing the adjusting process and the simple answer to this is that it's going to affect all the accounts including assets, liabilities, equity, revenue and expenses and the adjusting process is going to help us to get all those account types to be in their proper balances. In order to get more detail into an essay question such as this you do want to remember where we stand in terms of the adjusting process. What is the adjusting process might be useful to to put a brief summary of the adjusting process in. First of all, where does it line up in terms of the accounting process? We remember that the normal accounting cycle is going to have we're going to enter data including checks and bills and receipts of money, invoices. That's going to be the normal data input that we will have throughout the accounting period at the end of the time period then before we make the financial statements at the end of the month or year. We're going to have certain adjustments that we want to put into place to make sure that the timing is correct, that we have applied the correct revenue and expenses to the proper time periods and that's going to be of course what we're talking about here, the adjusting process. So remember that that adjusting process is something that isn't going to be necessarily correcting mistakes of the accounting department. We set up the accounting department to run in a particular way and there's just these some accounts that we just are going to put in as part of the system that need adjustments at the end of the time period. That's just going to be logistically the best way to merge the two worlds of having the most effective accounting data input and having the financial statements as correct as possible at the point in time that we create them at the cutoff date at the end of the month or the end of the year. So that means that we typically think of the income statement the revenue and expenses with the adjusting process because those are the timing accounts but of course the balance sheet will be affected as well as its liability and equity as we make these adjustments. In other words typically because they are adjusting entries and deal with timing we will normally have one balance sheet account and one income statement account at least meaning a balance sheet account will be impacted and so will an income statement account. In order to explain the process further we can choose any number of the examples and remember there's about six or so that are going to be just normal type of adjusting entries that we will have. We're going to have a supplies adjusting entry where we're going to count the supplies at the end of the time period and we're going to record expense related to the supplies that have been used and reduce the assets for the supplies. We have the equipment that's going to be on the books that we purchased and put on the books. We are going to depreciate that equipment and record the accumulated depreciation and the depreciation expense. If we take a look at these type of entries notice what they're doing increasing the expenses and that of course will decrease net income net income calculated as revenue minus expenses. On the other side they're actually decreasing the total assets so assets are going down net income is going down. Most of the adjusting entries are probably going to do this the two differences are if we adjust accounts receivable then we're typically saying something happened that an invoice went out after the cutoff date but the work was done before they cut off date and therefore we're going to have to bring that revenue back into the time period basically debiting accounts receivable and crediting revenue. That would increase revenue which would increase net income and it would increase accounts receivable which would increase total assets and the other example of an increase to net income would be the unearned revenue adjustment. Remember unearned revenue is kind of unusual so probably the most confusing for most people that are first learning this it doesn't it's not there for most for most businesses that don't have the type of industry in which they receive revenue or receive cash or some type of payment before they do the work but in those types of industries like a magazine distributor who receives subscription revenue before providing the subscription providing the magazines then we're just going to have the accounting department be set up so that they always record the cash as unearned revenue and then we'll make the adjustment at the end of the time period decreasing unearned revenue liability and increasing revenue a revenue account which of course would also increase the net income account. So the bottom line answer on these types of things we need to have the adjusting process to really be fully accurate notice that a lot of small businesses may not be doing all the adjusting entries at least not monthly they may be doing it yearly but if that's the case then we're probably going to have some distortions for these types of items that these adjustments aren't made and we're comparing things from month to month or we're not reporting something like depreciation which could be significant to the to the financial statements then they're not totally accurate for decision-making so in order to make them as accurate as possible we we would need to make these adjustments so that the financial statements are correct as of the end of the time period and that goes for basically all account types assets liability equity revenue and expenses. Note the one account not typically involved in the adjusting process that being cash something that's going to be involved all the time in most non-adjusting entry journal entries.