Accounting Fundamentals Certification (AFC) Practice Test

What is always involved in adjusting entries?

1. Two balance sheet accounts

2. At least one income statement and one balance sheet account

3. One asset account

4. Temporary and permanent accounts

The correct answer is: At least one income statement and one balance sheet account

Adjusting entries are essential to ensure that the financial statements reflect the accurate financial position and performance of a business at the end of an accounting period. They typically involve modifications made to accounts prior to preparing the financial statements, addressing discrepancies in the recognition of revenues and expenses. The correct choice highlights that at least one income statement account and one balance sheet account are involved in these entries. This reflects the fundamental accounting principles of accrual accounting, where revenues must be matched with the expenses incurred to generate those revenues, regardless of cash transactions. For instance, when adjusting for accrued expenses, the expense (income statement account) will increase, while the corresponding liability (balance sheet account) also increases. Similarly, deferral adjustments impact both types of accounts, ensuring that revenues and expenses are recorded in the correct accounting period. While other options mention specific types of accounts, they do not encompass the complete requirement for adjusting entries, which consistently impact both the income statement and the balance sheet. This comprehensive approach ensures a more accurate portrayal of a company’s overall financial performance and standing.