What is the effect of adjusting entries on net income?

Study for the AIPB Mastering Adjusting Entries Test. Use flashcards and multiple choice questions with hints and explanations. Prepare effectively for your exam!

Adjusting entries bring revenues and expenses into the period they belong to under accrual accounting. They record revenues earned but not yet billed and expenses incurred but not yet recorded, and they adjust for items like depreciation, amortization, prepaid expenses, and accrued items. Since net income is revenues minus expenses, the effect of these adjustments depends on what is being recognized or reclassified. Recognizing more expenses (such as depreciation or accrued utilities) reduces net income, while recognizing more revenue (such as accrued interest) increases it. Some adjustments shift amounts between accounts without changing cash, but overall they change net income in the direction dictated by whether the adjustment increases revenues or increases expenses.