Question

If the salaries of the sales staff of a manufacturing company are improperly recorded as a product cost, what will be the likely effect on net income of the period in which the error occurs?

Answer 1

Net Income will be overstated

Step-by-step explanation:

The journal entry for salaries payable is

Salaries Expense Dr.

To Cash A/C

(Being salaries paid recorded)

Salaries expense is charged to net income and the journal entry is

Net Income Dr.

To Salaries Payable

Salaries expense reduces net income as it being a deductible expenditure for a corporate.

In the given case, salary expense has been accounted as a product cost. This would reduce the expenses and thus would overstate the net income.