Auditing question

[accounting noob]

I am studying for the finals and have some questions about reclassification entries.
1. What accounts are affected by reclassification entries? Someone told me that they can only involve balance sheet accounts, but i'm not sure about that.
2. Can reclassification entry ever change the client's net income?

Thank you!

 

[kirby]

First of all, keep this distinction in mind: Adjusting entries are posted to the general ledger to make changes to account balances. Reclassifications are NOT posted to the GL. So they cannot change net income. They serve to move balances around. For example if after closing the books you notice that a liability account has an ending DEBIT balance, you may choose to RECLASS that amount to the Assets section of the balance sheet.Reclassifications can be made to Balance Sheet accounts as well as to Income Statement accounts.

 

[Fidget]

I am studying for the finals and have some questions about reclassification entries.
1. What accounts are affected by reclassification entries? Someone told me that they can only involve balance sheet accounts, but i'm not sure about that.
2. Can reclassification entry ever change the client's net income?

Thank you!

Reclassification is not an entry in itself. Reclassification is a change in the way that something is being reported, and the change will involve adjusting entries which can affect both P&L and Balance sheet to reflect the reclassification. Leases are a good example. If you are reporting an operating lease that is deemed to actually be a finance lease, then the adjusting entries are going to affect both P&L and Balance sheet.

Point to note: this only applies where the lease has been incorrectly classified in the first place. E.g if you have a valid operating lease, and something happens during the term of it to change the conditions of it that would then classify it as a finance lease, then it becomes a new lease from that point, and not a reclassification.