Net income if salaries expense is understated then

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Net income : If Salaries Expense is understated, then Net Income will be overstated. Balance sheet accounts : If the adjusting entry is ignored, assets will not be affected. Liabilities (Salaries Payable) will be understated. Owner's Equity will be overstated (due to Salaries Expense being understated, therefore causing Net Income to be overstated.) ANSWER Income Statement Accounts Revenue: Expense: Net Income: Balance Sheet Accounts Assets: Liabilities: Owner's Equity : On June 1, Cook Company purchased $2,210 of supplies on account and debited Supplies. At the end of the calendar year, $1,740 of supplies remained. If the appropriate adjusting entry is not made at the end of the year, what will be the effect on: (a) Income statement accounts (overstated, understated, or no effect)? (b) Net income (overstated, understated, or no effect)? (c) Balance sheet accounts (overstated, understated, or no effect)? EXPLANATION To answer this question correctly, first write down the "appropriate adjusting entry." If you are not sure how to do that, review the dictionary link for adjusting entry. Each adjusting entry affects at least 2 accounts - an income statement account (revenue/expense) and a balance sheet account (asset/liability). If adjusting entries are not made, there will be overstatements and understatements in the financial statements. For example, the adjusting entry relating to Prepaid Insurance debits (increases) Insurance Expense and credits (decreases) Prepaid Insurance. Failing to make and post No Effect Understated Overstated No Effect Understated Overstated
this adjusting entry will have the effect of understating Expenses (Insurance Expense) and, therefore, overstating Net Income. Prepaid Insurance would be overstated. The company purchased $2,210 worth of supplies. At the end of the year, $1,740 of supplies remained. The difference, $2,210 - $1,740, or $470, must have been used and needs to be expensed at the end of the year as an adjusting entry. The adjusting entry would be: Date Account Title Debit Credit Dec. 31 Supplies Expense 470 Supplies 470 Income statement accounts : If the adjusting entry is ignored, Supplies Expense will be understated. Revenues will not be involved. Net income : If Supplies Expense is understated, Net Income will be overstated. Balance sheet accounts : If the adjusting entry is ignored, assets (Supplies) will be overstated. Liabilities will have no effect. Owner's Equity will be overstated (due to Supplies Expense being understated, therefore causing Net Income to be overstated.) ANSWER Income Statement Accounts Revenue: Expense: Net Income: Balance Sheet Accounts Assets: Liabilities: (Choose one) (Choose one) (Choose one) (Choose one) No Effect Understated Overstated Overstated No Effect

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