“I don't understand,” complained Chris, who responded to your bulletin board posting in your responsibilities as a tutor. The complaint was in response to your statements that recording adjusting entries is a critical step in the accounting processing cycle, and the two major classifications of adjusting entries are prepayments and accruals.

Required:
Respond to Chris.
1. When do prepayments occur? Accruals?
2. Describe the appropriate adjusting entry for prepaid expenses and for unearned revenues. What is the effect on net income, assets, liabilities, and shareholders' equity of not recording a required adjusting entry for prepayments?
3. Describe the required adjusting entry for accrued liabilities and for accrued receivables. What is the effect on net income, assets, liabilities, and shareholders' equity of not recording a required adjusting entry for accruals?