Question

EX 3-8 Effect of omitting adjusting entry Ob) 2,5 When preparing the financial statements for the month ended January 31, accrued salaries owed to employees for January 30 and 31 were overlooked. The accrued salaries were included in the first salary payment in February. Indicate which items will be erroneously stated, because of failure to correct the initial error, on (a) the income statement for the month of February and (b) the balance sheet as of February 28.

Answer 1

Answer a: Items of income statement for the month of February

1.Salaries expense - Overstated.

Explanation:

Salary expense for the month of January is erroneously recorded in February. As the result salary expense for the month of February is overstated.

2. Net income - Understated

Explanation:

Since salary expense is overstated, the net income for the month of February is understated.

Answer b: Items of balance sheet as on February 28.

1. Salaries Payable:- Correct.

Explanation:

The accured salaries are overlooked in January, thus the Salaries Payable Account is understated as on January 31.

Now salary expense for the month of January is erroneously recorded in February. The entry made in Feb to record this error was - Salary Expense Account debit to Salaries Payable Account credit. Thus the Salaries Payable Account is overstated for Feburary.

Therefore, in balance sheet as on February 28, the understatement (Jan) & overstatement (Feb) in Salaries Payable Account will net off against each other as the result  Salaries Payable will be stated at its correct balance.

2. Stockholder's Equity:- Correct.

Explanation:

Expense is understated in January, , the net income for the month of January was be overstated. The net income the month of February is understated. Therefore the overstatement (Jan) & understatement (Feb) of net income will net off against each other as the result Retained earning will show the right balance. Ultimately Stockholder's Equity will be stated at its correct balance.