Q.3-5TI-d - 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, prepaid insurance and equity will be overstated. And in the income statement, insurance expense will be understated and net income will be overstated. 

Impact on Income Statement

Not recording the adjusting entries of prepaid insurance expired will reduce the insurance expense and therefore result in increase in net income.

Impact on Balance Sheet

Prepaid insurance are the assets of the business. Not recording expired prepaid insurance will increase the prepaid insurance (total assets). As net income is increased, it will also increase equity (Retained earnnings).