Answer to Question 1
Adjusting entries represent the recording of internal transactions in that outside parties are not involved. Without adjusting entries, certain assets (such as Prepaid Insurance, Supplies, and the book values of Building and Equipment) may be overstated. Also, certain liabilities (such as Wages Payable) may be understated. If expenses are incorrectly portrayed, then net income is understated or overstated. Consequently, the balance of the owner's Capital account will not be correct either.
Answer to Question 2
b
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