Powers Rental Service had the following items that require adjustment at year-end.

a. Earned $9,880 of revenue from the rental of equipment for which the customer had not yet paid.

b. The interest of $650 on a note receivable has been earned but not yet received.

1. Prepare the adjusting entries needed at December 31.

2. What is the effect on the financial statements if these adjusting entries are not made?

a. Accounts Receivable (Dr.) $9,880

Sales (Cr.) $9,880

If not adjusted it will have impact on revenue in Income statement being understated and Receivables being understated in the balance sheet by the amount of $9,800.

b. Notes Receivable (Dr.) $650

Interest Income (Cr.) $650

If not adjusted this will have effect on Income statement in the incomes being understated and ultimately decrease in net income and in balance sheet it will understate the receivables (assets) by the amount of $650.

Explanation:

1. Adjusting Entries

a. Accounts Receivable (Dr.) $9,880

Sales (Cr.) $9,880

b. Notes Receivable (Dr.) $650

Interest Income (Cr.) $650

2. If a. is not adjusted it will result in understatement of accounts receivables ultimate effect on assets side of the balance sheet and sales (revenue) will also be understated and will have ultimate effect on income statement by the amount of $9,880.

If b. is not adjusted this will have effect on income statement in a decrease in net income and in the balance sheet receivables will be declined by the amount of $650 on the assets side.