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Accrued salaries owed to employees for October 30 and 31 are not considered in preparing the financial statements for the year ended October 31
Accrued salaries owed to employees for October 30 and 31 are not considered in preparing the financial statements for the year ended October 31. Indicate which items will be erroneously stated, because of the error, on (A) the income statement for the year and (B) the balance sheet as of October 31. Also indicate whether the items in error will be overstated or understated.
a. Income Statement
| Salaries Expense | |
| Net Income |
b. Balance Sheet
| Salaries Payable | |
| Stockholders' Equity |
Expert Solution
When the adjustment of accrued salaries is omitted, the salaries expense and salaries payable accounts will be understated.
The understatement of salaries expense will imply an overstatement of net income.
An overstatement of net income implies an overstatement of stockholder's equity, since net income is transferred to retained earnings, which is a part of owner's equity.
The following is the required solution:
a Income statement:
| salaries expense | understated |
| Net income | overstated |
b. Balance sheet..
| Salaries payable | understated |
| Stockholder's equity | Overstated |
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