Question

At the end of the financial year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is TRUE?

a. Salary expense for the year was overstated.
b. Net profit for the year was understated.
c. Shareholders' equity at the end of the year was overstated.
d. The total liabilities at the end of the year were overstated.
e. Shareholders' equity at the end of the year was understated

Answer 1

The correct statement is b. Net profit for the year was understated.

Step-by-step explanation:

The correct statement in this case is b. Net profit for the year was understated. Accrued salaries are an expense that should be recorded at the end of the financial year to reflect the amount owed to employees. By omitting this adjusting entry, the expense is not properly recognized, leading to an understatement of net profit for the year.

For example, let's say that the accrued salaries at the end of the year amount to $10,000. If this amount is not recorded, the expense of $10,000 will not be deducted from the income statement, resulting in an understatement of net profit by that same amount.

This omission does not affect shareholders' equity directly since it is a revenue and expense issue and does not impact the overall equity of the company. It also does not affect the total liabilities at the end of the year, as accrued salaries are recorded as a current liability.