Final answer:
If a company forgets to record accrued utility expenses, it affects the accounting equation by having no effect on assets, understating liabilities, and overstating stockholders' equity. This is because expenses and liabilities are understated, and income is overstated due to the missing expense recognition.
Step-by-step explanation:
When a company fails to record accrued utility expenses, it does not recognize the expenses that it has incurred but not yet paid. According to the accrual basis of accounting, expenses should be recognized in the period they are incurred, regardless of when they are paid. As a result, the omission of the adjusting entry for accrued utility expense would lead to the understatement of expenses and liabilities, and the overstatement of net income and retained earnings within stockholders' equity components. Therefore, the correct effect on the accounting equation would be:
- Assets: No Effect
- Liabilities: Understated
- Stockholders' Equity: Overstated
That corresponds to choice e, i.e., Assets: No Effect, Liabilities: Understated, Stockholders' Equity: Overstated, as the liabilities (utility expenses payable) should be higher and stockholders' equity should be lower due to higher expense recognition reducing net income and, in turn, retained earnings.