Question

repaid next year (ignore interest). 21. Alpha paid cash for one year of rent in the third month of the year but erroneously recorded it as cash paid to satisfy an account payable. Alpha also failed to record the required AJE for the rent used during the year. - -- maalinna dahit innline and credit to Cooh

what accounts will be understated and overstated?

Please provide accounts used for this entry.

Answer 1

Incorrect entry that was made:

Debit Accounts payable

Credit Cash

The correct journal entries that should have been made is:

On third month:

Debit Prepaid rent

Credit Cash

And at year end AJE:

Debit Rent expense

Credit Prepaid rent

From the above, we can see that accounts payable was wrongly debited. It means that now the balance in accounts payable is understated as some part of it has been wrongly debited or reduced.

Another effect of these errors is, rent expense for current year has not been booked in the adjusting journal entry (AJE).So, rent expense is also understated. Also, there is no journal entry in prepaid rent account on third month and at year end in AJE.