Adjusting entries affect liquidity through their impact on assets and liabilities on the balance sheet.

Question

Quizplus · Accepted Answer

Adjusting entries typically involve recognizing revenues or expenses that have not yet been recorded, as well as adjusting the carrying value of assets or liabilities. These adjustments can impact the balances of assets and liabilities on the balance sheet, directly affecting liquidity. For example, recognizing an expense that was previously unrecorded will reduce net income and decrease the balance of retained earnings, which is an equity account. This reduction in equity can reduce the company's liquidity by decreasing the amount of available funds that can be used to pay off debts, invest in projects, or pay dividends to shareholders. Similarly, adjusting the carrying value of an asset, such as a piece of equipment or inventory, can impact the company's liquidity by changing the amount of cash or other assets available to the company.

Adjusting Entries Affect Liquidity Through Their Impact on Assets and Liabilities