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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Effects of errors on financial statements

The accountant for Healthy Life Company, a medical services consulting firm, mistakenly omitted adjusting entries for (a) unearned revenue earned during the year ($34,900) and (b) accrued wages ($12,770). Indicate the effect of each error, considered individually, on the income statement for the current year ended July 31. Also indicate the effect of each error on the July 31 balance sheet. Set up a table similar to the following, and record your answers by inserting the dollar amount in the appropriate spaces. Insert a zero if the error does not affect the item.

    Error(a)   Error(b)  
    Over-stated Under-stated Over-stated Under-Stated
1. Revenue for the year would be $— $— $— $—
2. Expenses for the year would be $— $— $— $—
3. Net income for the year would be $— $— $— $—
4. Assets at July 31 would be $— $— $— $—
5. Liabilities at July 31 would be $— $— $— $—
6. Owner’s equity at July 31 would be $— $— $— $—

To determine

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  All adjusting entries affect at least one income statement account (revenue or expense), and one balance sheet account (asset or liability).

Unearned revenue:

Unearned revenue is the revenue which is earned in advance, ahead of goods supplied or services performed. As per the revenue recognition principle it is not recorded in the books of accounts until earned. Hence, this is considered as a liability for the business.

Accrued expenses:

Accrued expenses refer to the expenses that are incurred but cash is not yet paid.

To indicate: The effect of each error on the income statement and on the balance sheet of the Company H.

The omitted adjusting entries in the books of Company H are as follows:

  1. a. Unearned revenue during the year $34,900
  2. b. Accrued wages $12,770
Explanation

The following table explains the effects of each error on the income statement and balance sheet of the Company H:

    Error a Error b
1 Revenue for the year would be The omitted adjusting entry for unearned revenue earned ($34,900) during the year, understated the revenue by $34,900. The omitted adjusting entry on the accrued wages did not have any effect on the revenue of the year.
2 Expenses for the year would be The omitted adjusting entry for unearned revenue earned did not have any effect on the expenses of the year. The omitted adjusting entry on the accrued wages ($12,770), understated the expenses.
3 Net income for the year would be The omitted adjusting entry for unearned revenue earned ($34,900), understated the revenue for the year as a result the net income for the year is also understated. As the adjusting entry for the accrued wages is omitted, so the expenses are understated as a result the net income is also understated...

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