Final answer:
The company would understate expenses and overstate net income by $7,600 due to the failure to record accrued and unpaid employee salaries. This refinement does not directly affect total assets, but it does lead to an incorrect net income figure and an overstated shareholders' equity.
Step-by-step explanation:
If a company fails to make an adjusting entry for accrued and unpaid employee salaries of $7,600 on December 31, the correct statement is that it will understate expenses and overstate net income by $7,600. This is because the salaries are expenses that have been incurred but not yet recorded, meaning that the company's liabilities (salaries payable) are understated by $7,600 and its expenses (salary expense) are also understated by this amount. As a result, net income is overstated because the expense that should have been deducted has not been recognized.
This accounting error does not directly affect the total assets on the balance sheet, since the unpaid salaries would be recorded as a liability, not an asset. Therefore, the company’s assets are not directly misstated, but the omission of the liability results in an incorrect net income figure. The failure to record the expense also means that shareholders' equity is overstated, because net income eventually flows into retained earnings, which is a component of shareholders’ equity.
Accurate accounting practices dictate that the company should have recorded a debit to salary expense and a credit to salaries payable to accurately reflect the obligation to pay and the expenses incurred during the period.