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Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
ISBN: 9781285866307

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BuyFindarrow_forward

Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
ISBN: 9781285866307
Textbook Problem

Effect of omitting adjustments

For the year ending April 30, 2016, Urology Medical Services Co. mistakenly omitted adjusting entries for (1) $1,400 of supplies that were used, (2) unearned revenue of $6,600 that was earned, and (3) insurance of $9,000 that expired. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income for the year ended April 30, 2016.

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

The effects on the revenue, expense, and net income, if the adjusting entries are not recorded are as follows:

Adjustment Not Recorded Income Statement
(a) Revenue (b) Expenses (c) Net income
1. Supplies expense   Understated Overstated
2. Unearned revenue Understated   Understated
3. Insurance expense   Understated Overstated

Table (1)

1. Supplies expense

Given entry would increase the supplies expense account, and decrease the supplies account.  If the adjusting entry for supplies expense is not recorded, and it will affect two accounts such as supplies expense (expense), and supplies (asset) account...

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