Question

Accrued salaries owed to employees for October 30 and 31 are not considered in preparing the financial statements for the year ended October 31. Indicate which items will be erroneously stated, because of the error, on (A) the income statement for the year and (B) the balance sheet as of October 31. Also indicate whether the items in error will be overstated or understated.

Answer 1

Answer:

Indication of items erroneously stated on:

A) the income statement for the year

Salaries Expense will be understated.

Therefore, the Net Income will be overstated.

B) the balance sheet as of October 31:

Salaries Expense Payable (current liabilities) will be understated.

Explanation:

When accrued salaries are not accounted for in the financial statements for an accounting period, it means that the revenues generated for that period are not being matched with the expenses incurred in generating the revenues.  Such omission does not agree with the accrual concept and the matching principle of generally accepted accounting principles.  These require that expenses are accrued whether paid for or not, and that expenses are matched to the period's revenue since they are necessarily incurred in generating such revenue.