Question

When Alexander Company purchased supplies for cash for $500, it incorrectly recorded the journal entry as a debit to Supplies of $5,000 and a credit to Cash of $5,000. Before correcting this error:

a. Cash is understated and Supplies is overstated
b. Cash is overstated and Supplies is overstated
c. Cash is understated and Supplies is understated
d. Cash is overstated and Supplies is understated

Answer 1

Answer: Before correcting this error:

"a. Cash is understated and Supplies is overstated"

Explanation: By incorrectly registering a debit of $ 5000 in the supply account we are exaggerating the supplies, because the registration would indicate that the company has $ 5000 in supplies, when in fact it is not.

And the cash would be underestimated because we really only spent $ 500 of cash and the registration of the credit in the cash account would indicate that the company spent $ 5000, and it really isn't.