Question

If a journal entry and posting for Salaries Expense that incurred during this year but will be paid until next year is accidentally omitted, what would be the impact on the financial statements?

A) Net Income would be overstated (Expenses understated) and Balance Sheet liabilities would be understated.
B) Net Income would be overstated (Expenses understated) and Balance Sheet assets would be overstated.
C) Net Income would be understated (Expenses overstated) and Balance Sheet assets would be understated.
D) Net Income would be understated (Expenses overstated) and Balance Sheet liabilities would be understated.

Answer 1

Answer: The correct answer is A) Net Income would be overstated (Expenses understated) and Balance Sheet liabilities would be understated.

Explanation: An omission of a posting of an expense incurred during a financial year and payable in thesubsequent year will lead to an understatement of expenses and understatement of liabilities.

In general, when an expense is omitted it leads to increased net income as less expense will be knocked off against income.

The balance sheet on the other hand will be understated in terms of a reduced liability balance.