What aspect of equity may be influenced by adjusting entries?

Adjusting entries specifically aim to ensure that revenue and expenses are recognized in the correct accounting period, in line with the accrual basis of accounting. One major area affected by these entries is shareholders’ equity.

When adjusting entries are made, they can directly affect the income statement by recognizing revenues that have been earned but not yet recorded or expenses that have been incurred but not yet paid. These changes in revenue and expenses then flow through to the net income. Since net income is a component of retained earnings, which is a key element of shareholders' equity, any adjustments made will ultimately influence the overall equity.

For example, if an adjusting entry increases revenue, it increases net income, which subsequently increases retained earnings and thus shareholders’ equity. Conversely, recognizing an expense will decrease net income and therefore reduce equity. This reflects the dynamic nature of adjusting entries and their critical role in presenting an accurate financial position in terms of shareholder ownership.