Question

On December 31, Rivera Company receives a utility bill in the mail for $440. Rivera Company intends to pay the bill in early January of next year. 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)?

Answer 1

Answer:

(a)overstated

(b)overstated

(c)no effect

Explanation:

(a) As there is an expense account (utilities expense) which, is not included in the income statement, result for the year will be higher than if was.

(b)The revenues account will be oaky. But, the total expenses will be lower, as there are cost of the period which are not included.

So the Net incoem will be higher than a correct income as their expenses do not include this utilities expense

(c) The balance sheet  will have no effect in the total Asset or Total Liaiblities+SE but, it is a change in the composition.

The income (reained earnings) should be lower as the income will be lower and a liability will be create (utilities payable) to fill this so:

with the mistake:

liab 0  equity (+400)

ammending the mistake

liab 400 equity 0

the net effect is zero.

It will decrease equity and increase liability, but the su of both will be the same