Question

Why might liabilities be understated if proper adjusting entries are not made at the end of an accounting period?

a) Adjusting entries are not necessary
b) To boost reported profits
c) To mislead stakeholders
d) To reflect the true financial position

Answer 1

Liabilities may be understated if proper adjusting entries are not made, which can happen due to various reasons. It can impact the overall liability balance, reported profits, mislead stakeholders, and fail to reflect the true financial position.

Step-by-step explanation:

Liabilities may be understated if proper adjusting entries are not made at the end of an accounting period for several reasons:

1. Adjusting entries are necessary to ensure that all expenses and liabilities are properly recorded. Without these entries, certain liabilities may be omitted or underreported, leading to an understatement of the overall liability balance.
2. If adjusting entries are not made, it can boost reported profits. By not recognizing certain expenses or liabilities, the net income will be higher, giving the impression of higher profits.
3. In some cases, misleading stakeholders may be the intention behind not making proper adjusting entries. This can be done to present a better financial position or to deceive investors or creditors.
4. Finally, adjusting entries are important to reflect the true financial position of a company. By not recording all liabilities accurately, the financial statements will not provide an accurate representation of the company's financial health.