As the book-keeper for your company you are required to create quarterly financial statements (Income Statement, Statement of Owner's Equity Balance Sheet and Statement of Cash Flows) in order to report on the financial activities of the company for the quarter (three months). It is now March 29th, and in preparation for creating the 1st quarter's financial statements ( as of 3/31), you have called a meeting with the Dept. Managers for Accounts Receivable and Accounts Payable to confirm deadlines that have to be met. As the meeting is about to start the owner walks in - she sits quietly as you explain the deadlines, but as soon as you have finished she says "Well, for this quarter, there is no need to record transactions for invoices that we have not paid by March 31. We can enter/expense those invoices when we pay them in April."
We have learned about four types of adjustments: (1) prepaid expenses, (2) unearned revenues, (3) accrued revenues, and (4) accrued expenses. Is the owner correct or do you feel that one of these types of adjusting entries is necessary in this situation? If so, name the type of adjusting entry that is needed.
Why is this type of adjustment necessary? (Refer to concepts in the chapter) Discuss the status of the accounts affected if the adjustment is not made (understated or overstated), and explain the impact of the adjustment on the financial statements
Provide an example of the type of adjusting entry you think is needed; include the debit and credit, with dates and amounts.