Final answer:
The income statement will show understated expenses and overstated net income if an adjustment for supplies is not made. Accounting profit is calculated by subtracting explicit costs from total revenues, such as labor, capital, and materials from sales revenue.
Step-by-step explanation:
If an adjusting entry for the supplies is not made at the end of the year, the effects on the income statement accounts will be the following: the expenses will be understated because the cost of supplies that were actually used throughout the year has not been fully recorded. Simultaneously, the net income for the year would be overstated because expenses were not fully recognized. Specifically, the company used $770 of supplies (starting with $2,550 and ending with $1,780 of supplies left), but if this is not recorded, the entire $2,550 will remain capitalized as an asset until it's adjusted. Therefore, $770 in expenses are missing from the income statement.
The formula for accounting profit is total revenues minus explicit costs. For example, if a firm had sales revenue of $1 million last year and spent $600,000 on labor, $150,000 on capital, and $200,000 on materials, then the firm's accounting profit would be:
Accounting profit = $1,000,000 (Revenue) - ($600,000 (Labor) + $150,000 (Capital) + $200,000 (Materials))
Accounting profit = $1,000,000 - $950,000
Accounting profit = $50,000