Question

Which of the following will happen if the accrual adjustment entry is not made to record an expense incurred but not yet recorded? a. Expenses will be understated and liabilities will be overstated. b. Both expenses and liabilities will be understated. c. Expenses will be overstated and liabilities will be understated. d. Both expenses and liabilities will be overstated.

Answer 1

Answer:

b. Both expenses & liabilities will be understated.

Explanation:

Accrual System of Accounting states that transactions should be recorded when they are entered into, irrespective of their cash settlement occurred r not.

Under Accrual Accounting System : Expense incurred but not yet paid , is an Outstanding Expense. It is recorded as an expense & a liability to be paid.

Journal Entry : Expense Dr to Expense Outstanding Cr

So, Not recording this 'Outstanding Expense' entry : leads to understatement of both expense & liability of that accounting period.