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Effect of omitting adjustments For the year ending August 31, Mammalia Medical Co. mistakenly omitted adjusting entries for (1) depreciation of $5,800, (2) fees earned that were not billed of $44,500, and (3) accrued wages of $7,300. Indicate the effect of the errors on (a) revenues, (b) expenses, and (c) net income for the year ended August 31.

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Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

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Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
Chapter 3, Problem 3.8BPE
Textbook Problem
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Effect of omitting adjustments

For the year ending August 31, Mammalia Medical Co. mistakenly omitted adjusting entries for (1) depreciation of $5,800, (2) fees earned that were not billed of $44,500, and (3) accrued wages of $7,300. Indicate the effect of the errors on (a) revenues, (b) expenses, and (c) net income for the year ended August 31.

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).

To determine: The effects on the revenue, expense, and net income, if the adjusting entries are not recorded.

Explanation of Solution

1. Depreciation expense

Given entry would increase the depreciation expense account, and increase the accumulated depreciation account.  If the adjusting entry for depreciation expense is not recorded, and it will affect two accounts such as depreciation expense (expense), and accumulated depreciation (contra-asset) account. Hence the depreciation expense of $5,800 has been understated the total value of expenses of the business, and it overstated the value of net income of the business.

2. Fees earned

Given entry would increase the fees earned account, and increase the accounts receivable account. If the adjusting entry for accrued revenue is not recorded, and it will affect two accounts such as revenue account (revenue), and accounts receivable account (asset)...

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