Question

Accrued salaries payable of $51,000 were not recorded at December 31, 2012. Office supplies on hand of $34,000 at December 31, 2013 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause

a. 2013 net income to be understated $85,000 and December 31, 2013 retained earnings to be understated $34,000.
b. 2012 net income and December 31, 2012 retained earnings to be understated $51,000 each.
c. 2012 net income to be overstated $17,000 and 2013 net income to be understated $34,000.
d. 2013 net income and December 31, 2013 retained earnings to be understated $34,000 each.

Answer 1

Two accounting errors—one with accrued salaries not being recorded and another with office supplies incorrectly expensed—would lead to an understatement of 2013's net income and retained earnings each by $34,000. Understanding accurate transaction recording is key to assessing financial statements' validity, similar to catching billing errors or calculating accounting profits by subtracting explicit costs from revenues.

Step-by-step explanation:

The question deals with the effect of unrecorded and misclassified transactions on a company's financial statements, specifically on net income and retained earnings for the year 2013. If accrued salaries payable of $51,000 were not recorded at the end of 2012, this would result in expenses being understated in 2012 and overstated in 2013, as the expense would be recognized when the salaries are paid. Conversely, if office supplies worth $34,000 were incorrectly expensed rather than being recorded as inventory in 2013, this would result in an overstatement of expenses and an understatement of net income and retained earnings for the same year.

To illustrate the significance of correctly recording financial transactions, consider a scenario where someone, such as Noel in the provided information, catches a significant billing error that, if unaddressed, would have had substantial financial implications. Similarly, understanding the concept of accounting profit as shown in the self-check questions—where accounting profit is total revenues minus explicit costs—is crucial in assessing the company's financial health. In that scenario, the firm's accounting profit is calculated as $1,000,000 minus ($600,000 + $150,000 + $200,000) = $50,000.