Q.3-5TI-c - 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, accumulated depreciation will be understated, building will be overstated and equity will be overstated. And in the income statement, depreciation expense will be understated and net income will be overstated. 

Impact on Income Statement

Depreciation expense are the part of expenses, not recording depreciation will reduce the depreciation  expense and therefore result in increase in net income.

Impact on Balance Sheet

As depreciation is not recorded at the end of the year, it will reduce the accumulated depreciation, therefore it will increase the balance of building (total assets). Also as net income is increased, it will increase equity (Retained earnings) also.