All companies make adjusting entries. Review your selected company\'s annual rep

Question

All companies make adjusting entries. Review your selected company's annual report.

Find a line item listed on either the income statement or balance sheet that would indicate an adjusting entry was necessary and describe the entry.

What do you think the effect would be on the company's financial statements if the adjustment was not made? Be specific. Name the statement, the category or accounts, and whether it would have increased or decreased.

Link to CBS Corp Annual report : http://www.marketwatch.com/investing/stock/cbs/financials

Explanation / Answer

The line item selected in this case is "Depreciation". The company is recognizing depreciation expense every year by debiting depreciation expense and crediting accumulated depreciation account, as is evident from the income statement and the balance sheet. The adjusting entry for depreciation expense is given below:

The above adjustment is required to be made every year, because fixed assets such as plant and equipment, machinery, buildings, etc. are recorded at cost at the time of acquisition (that, are capitalized). It is, therefore, necessary to allocate the cost of such assets over their useful lives.

Depreciation is a non-cash expense, however, it has the effect of reducing net income for the company which in turn reduces the tax liability. Accumulated depreciation account is a contra-asset account which is reported in the balance sheet at the total value to adjust the cost of asset on an yearly basis. The total value in this account is reduced from the value (cost) of fixed assets in the balance sheet to reflect the current/adjusted/net value.

If the adjustment is not made, the assets would continue to get recorded at their historical value (cost) in the balance sheet resulting in an overstatement of total assets held by the company. Non recording of depreciation expense would also result in an overstatement of net income (as total expenses would be understated) resulting in higher tax liability. An overstatement of net income would result in transfer of higher value to retained earnings/reserves and surplus which in turn would result in an overstatement of owner's equity. Thus, both the income statement and balance sheet wouldn't present a true and fair financial position of the company.

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