“Adjusting entries follow a pattern – they involve an account from the balance sheet and an account from the income statement, but they don’t ever involve cash.” Do you agree? Explain.

Yes, I agree with the statement. Adjusting entries are made at the end of an accounting period to record all revenues and expenses that have not been recorded but belong in the current period. They are also used to record things that have been paid for in advance and to record revenues that have been earned, but not yet received.

The reason why adjusting entries do not involve cash is because they are made to record revenues and expenses in the period in which they are earned or incurred, regardless of when the cash is received or paid.

For example, if a company provides services to a client in December but does not receive payment until January, an adjusting entry would be made in December to record the revenue earned. The entry would debit (increase) accounts receivable (a balance sheet account) and credit (increase) service revenue (an income statement account). No cash is involved in this entry because the cash will not be received until January.

Similarly, if a company pays for a one-year insurance policy in advance, an adjusting entry would be made each month to record the expense incurred. The entry would debit (increase) insurance expense (an income statement account) and credit (decrease) prepaid insurance (a balance sheet account). Again, no cash is involved in this entry because the cash was paid in advance.

So, adjusting entries always involve one balance sheet account (like accounts receivable or prepaid insurance) and one income statement account (like service revenue or insurance expense), but they never involve cash.