Q. 3-5TI-a - Horngren'S Financial And Managerial Accounting

Question

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not recorded. a. Office Supplies used, \(800. b. Accrued service revenue, \)4,000. c. Depreciation on building, \(3,500. d. Prepaid Insurance expired, \)650. e. Accrued salaries expense, \(2,750. f. Service revenue that was collected in advance has now been earned, \)130

Step-by-Step Solution

Answer

In the balance sheet, office supplies and equity will be overstated. And in the income statement, supplies expense will be overstated and net income will be overstated. 

Impact on Income Statement

Office supplies used are the part of the expenses of the business, hence not recording the adjusting entries will reduce the supplies expense and therefore result in increase in net income.

Impact on Balance Sheet

Office supplies used should be reduced from the office supplies balance, not recording adjusting entries will increase the office supplies balance in asset section. Also, as net income is increased, it will increase equity (Retained earnings) also.