Question

XYZ company has 6 employees. 3 employees earn $1,000 each per week, 2 employees earn $2,000 each per week and one employee that earns $3,000 per week. The company pays wages every Friday for work performed thru Friday. The employees work a five day work week. 12/31/21 is a Wednesday. 1.) Record the adjusting for 12/31/21. If the company fails to make an adjusting entry, the impact on the accounting equation is: 2.) Record the payment of wages on 1/2/22 if XYZ makes reversing entries. 3.) Record the payment of wages on 1/2/22 if XYZ doesn't make reversing entries.
please explain I am trying to understand the concept for this problem not just to check my answers. Thank you.

Answer 1

1. Adjusting Entries -

Adjusting Entries Date Accounts Title Debit Credit 12/31/2021 Wages Expenses $ 3,600 Wages Payable $ 3,600 (Being Wages Expense incurred and accrued)

Working -

Employees Wages per week For 3 Days 3 $ 1,000 $ 600 2 $ 2,000 $ 1,200 1 $ 3,000 $ 1,800 6 $ 3,600 LO

2. Impact in Accounting Equation -

Assets No Effect Liabilities Understated If company fails to record adjusting entry + Equity Revenue COGS Expenses Net Income Overstated No Effect No Effect Understated Overstated

Explanation -

If the company fails to make adjuting entry then expense will be understated due to less expense, Net Income will get overstated as if less expenses we accounted then net income will go up.

On the Balance sheet side If net Income goes up then equity portion which goes into equity will be overstated. And Accrued Expense not booked then liabilities will be understated.

3. Payment of Wages of Reversing entry made -

Credit Journal Entries Date Accounts Title Debit 1/1/2022 Wages Payable $ 3,600 Wages Expense (Being Entry reversed) $ 3,600 1/2/2022 Wages Expense $ 3,600 Cash (Being Accrued wages payment made) $ 3,600

4. Payment of Wages of Reversing entry not made -

Credit Journal Entries Date Accounts Title Debit 1/2/2022 Wages Payable $ 3,600 Cash (Being Accrued wages payment made) $ 3,600