Question

3. What is the effect on (a) net income (b) assets (c) liabilities (d) stockholders' equity of not recording a required adjusting entry for prepayments? For each item, indicate clearly whether the effect will be an Increase, a Decrease, or No Effect. Please present your answers using the template below. I have done Net income as an example.

Item Effect	Increase	Decrease	No Effect
Net Income	X
Assets
Liabilites
Stockholders' Equity

Answer 1

Let us take the example of Prepaid Insurance, The adjusting entry for this is a Debit to Insurance expense and Credit to Prepaid Insurance, So if this journal entry is not passed then the following will be the effect:
Items	Increase		Decrease		No Effect
Net Income	X
Assets	X
Liabilities
Stockholder's Equity	X
Note:The Stockholder's Equity will also be effected as the Net Income is transferred to Stockholder's Equity. Hence if not passing the adjusting entry increases the Net Income then Stockholder's Equity will also increases