Which accounts are typically adjusted by end-of-period adjusting entries?

• A. Prepaid expenses, accrued revenues, and accrued expenses
• B. Cash and accounts payable
• C. Dividends and common stock
• D. Notes payable and retained earnings

Answer: (A)

Adjusting entries at the end of the period are made to reflect revenues earned and expenses incurred that haven’t yet been recorded, and to update asset and liability balances to their proper amounts. The three accounts that are typically adjusted fit this purpose.

Prepaid expenses are assets that represent payments made before the related benefit is received. As time passes, part of that asset is used up and becomes an actual expense. The adjusting entry reduces the prepaid asset and increases the corresponding expense, aligning the cost with the period it benefits.

Accrued revenues are revenues earned in the period but not yet billed or collected. Recording these ensures revenue is recognized when earned, not when cash is received, so an asset (like Accounts Receivable) is created and revenue is recognized.

Accrued expenses are expenses incurred in the period but not yet paid or recorded. The adjusting entry increases the expense and creates a liability (such as Accounts Payable or Wages Payable), matching the cost to the period it relates to.

In contrast, cash and some equity accounts (like dividends and common stock) aren’t adjusted in this way at period end, and notes payable typically aren’t adjusted except for related items like interest (which would be handled as part of accrued expenses). Retained earnings is updated indirectly through the net income or loss after these adjustments, not directly by a typical adjusting entry.