What is the effect of adjusting entries on net income?

Adjusting entries are essential accounting processes that ensure that the financial statements reflect the true financial position and performance of a business. When businesses record adjusting entries, they are typically recognizing expenses that have been incurred but not yet recorded, or they are recognizing revenues that have been earned but not yet billed or received.

The correct response indicates that adjusting entries can decrease reported net income. This occurs when expenses are recognized that lead to a reduction in net income for the accounting period. For example, if a company incurs utility expenses in December but does not receive the bill until January, an adjusting entry is required to recognize that expense in December. This recognition decreases the net income for the period because expenses reduce net income.

Adjusting entries can also increase net income if they involve recognizing unrecorded revenues. However, the key aspect here is that they can have various effects on net income, including the possibility of decreasing it, which is why choosing the correct options ensures clarity in understanding how adjusting entries operate within the accounting cycle.