State the adjusting entries for the above implicit transactions. If an organisation fails to pass adjusting entries for items (i) to (iv) above, what will be the impact on 'Statement of Profit and Loss' and on 'Balance Sheet'?

Identifying Implicit Transactions and Adjusting Entries

Let's assume the 'above implicit transactions' refer to the following common scenarios (as the question lacks specific details, we'll proceed with these standard examples):

1. Accrued Revenue: Revenue earned but not yet billed or received. (e.g., interest earned on a deposit but not yet credited).
2. Accrued Expense: Expense incurred but not yet paid. (e.g., salaries owed to employees at the end of the period).
3. Deferred Revenue (Unearned Revenue): Cash received for goods or services not yet delivered. (e.g., advance rent received).
4. Deferred Expense (Prepaid Expense): Cash paid for goods or services not yet used. (e.g., prepaid insurance).

Adjusting Entries

Here are the adjusting entries for each scenario:

1. Accrued Revenue

Entry:

Account	Debit	Credit
Accounts Receivable	XXX
Revenue		XXX

This entry recognizes the revenue earned and creates a corresponding asset (Accounts Receivable).

2. Accrued Expense

Entry:

Account	Debit	Credit
Expense	XXX
Accounts Payable		XXX

This entry recognizes the expense incurred and creates a corresponding liability (Accounts Payable).

3. Deferred Revenue

Entry:

Account	Debit	Credit
Unearned Revenue	XXX
Revenue		XXX

This entry recognizes the portion of revenue earned and reduces the liability (Unearned Revenue).

4. Deferred Expense

Entry:

Account	Debit	Credit
Expense	XXX
Prepaid Expense		XXX

This entry recognizes the portion of the expense used and reduces the asset (Prepaid Expense).

Impact of Failing to Pass Adjusting Entries

If an organization fails to pass these adjusting entries, the following impacts will be observed:

Impact on Statement of Profit and Loss

• Accrued Revenue (Not Recorded): Revenue will be understated, leading to lower net income.
• Accrued Expense (Not Recorded): Expense will be understated, leading to higher net income.
• Deferred Revenue (Not Adjusted): Revenue will be overstated (as the entire cash received is initially recorded as revenue), leading to higher net income.
• Deferred Expense (Not Adjusted): Expense will be understated, leading to higher net income.

Impact on Balance Sheet

• Accrued Revenue (Not Recorded): Assets (Accounts Receivable) will be understated.
• Accrued Expense (Not Recorded): Liabilities (Accounts Payable) will be understated.
• Deferred Revenue (Not Adjusted): Liabilities (Unearned Revenue) will be overstated.
• Deferred Expense (Not Adjusted): Assets (Prepaid Expense) will be overstated.

In essence, failing to make adjusting entries results in an inaccurate portrayal of both the company’s profitability and its financial position. The financial statements will not comply with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS).