Question

After preparing its financial statements for June, Pinnacle Corporation realizes that its income statement shows total revenues that are $500 too high and total expenses that are $500 too low. What effect will these errors have on Pinnacle’s balance sheet for the month, assuming all other account balances listed on that sheet are correct?

Answer 1

The answer is: The total liabilities and equity will be $1,000 higher than the total assets amount, so the balance sheet will not be balanced.

Step-by-step explanation:

If the income statement overstated revenue by $500 and understated expenses by $500, that will result in $1,000 in "fake" profit. If profit is overstated by $1,000 then the balance sheet will also be altered. The total liabilities and equity will be $1,000 higher than the total assets amount. The balance sheet will not be balanced.