Question

If a company fails to make an adjusting entry to record supplies expense, then:a.stockholders’ equity will be understated.b.expense will be understated.c.assets will be understated.d.net income will be understated

Answer 1

b. Expense will be understated.

Step-by-step explanation:

The adjusting journal entry to record supplies expense would have been:

Supplies expense DR.

To Supplies

The effect of above adjusting entry would have been the following;

1. Expenses for the period would have been increased.
2. Increase in expenses would have decreased the net income for the period.
3. Decrease in net income would have decreased the stockholders' equity as well.
4. Also, credit to supplies means decrease in the asset.

Thus, failure to post the above adjusting entry would have:

1. Decreased expenses.
2. Decrease in expenses would have increased the net income.
3. Increased net income would have increased the stockholders' equity.
4. Also, asset would have been overstated.

Therefore, the correct option is expenses would have been understated if the company fails to post the above adjusting entry.