Which of the following statements about adjusting entries for accruals is correct?

• A. They involve cash being exchanged in the same period
• B. They never affect balance sheet accounts
• C. They adjust retained earnings only
• D. They record revenue earned or expense incurred in the current period before cash is exchanged

Answer: (D)

In accrual accounting, adjusting entries bring in revenues when they are earned and expenses when they are incurred, regardless of when cash actually moves. An adjusting entry for an accrual specifically captures revenue earned or expense incurred in the current period before cash is exchanged. For example, if a service is performed in the period but not billed or paid yet, you record revenue and an asset (like accounts receivable). If a expense is incurred in the period but cash will be paid later, you record the expense and a liability (like accrued liabilities). These entries ensure the income statement reports the correct period’s activity and the balance sheet reflects the related receivables or payables.

The other statements don’t fit because accrual adjustments do involve balance sheet accounts (receivables or payables), not just income statement items; they don’t require cash in the same period, and while net income affects retained earnings, the adjustments affect more than just retained earnings by altering both revenue/expense accounts and their related assets or liabilities.