Final answer:
The omission of unpaid special insurance costs incurred by December 31, 2013, results in the understatement of accrued liabilities and the overstatement of retained earnings in the company's balance sheet for that period.
Step-by-step explanation:
The question concerns the accounting treatment of accrued liabilities and retained earnings for unpaid insurance costs in a company's balance sheet. When special insurance costs related to work in process are incurred but not recorded by the end of the accounting period, it results in an understatement of the company's accrued liabilities. Simultaneously, retained earnings will be overstated because the expenses have not been recognized, which would have decreased net income and consequently retained earnings.
From an accounting standpoint, recognizing accrued liabilities ensures that expenses are matched with the revenues of the period they are related to, adhering to the accrual basis of accounting. In the case of work in process, not recording the related insurance costs understates expenses, temporarily inflating the retained earnings in the financial statements. It is essential for insurance companies to accurately report such costs, as insurance premiums and claims are vital parts of their financial transactions.