Question

At August 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for August and (b) the balance sheet as of August 31

Answer 1

Step-by-step explanation:

The adjusting entry to record the prepaid insurance expired is shown below:

Insurance expense A/c Dr XXXXX

To Prepaid Insurance XXXXX

(Being insurance expense is recorded)

Since the insurance is expired, we debited the insurance expense and credited the prepaid insurance account

Since this adjusting entry omits that results

a. The expense account is understated due to which the net income is overstated

b. And, the prepaid insurance account is a asset account that would be overstated. As a result, the stockholder equity is also overstated