In: Accounting
At the end of the fiscal year, the usual adjusting entry for depreciation on equipment was omitted (i.e., the entry was not made). Which of the following statements is true?
a. Net income will be understated (too low) for the current year.
b. Total liabilities and total assets will be overstated (too high).
c. The Balance Sheet and Income Statement will be misstated but the Statement of Retained Earnings will be correct for the current year.
d. Total assets will be overstated (too high) at the end of the current year.
The correct answer is (d) Total assets will be overstated (too high) at the end of the current year.
Depreciation is the decrease in the value of an asset due to
usage and passage of time. Charging depreciation expense to
accumulated depreciation is an adjusting entry made at the end of
every year while preparing the books of account. That means
depreciation expense is debited which is increase in expense and
accumulated depreciation credited which is a credit - offseting
entry for the asset. When the adjusting entry for depreciation on
equipment is omitted, depreciation expense is not debited and the
expense is not reduced in the income statement. Hence, income
statement would be overstated. Hence, option (a) is wrong.
When income statement is overstated, retained earnings and
shareholders equity also would be overstated. Hence, option (c) is
also wrong.
In the Balance sheet, the value of equipment asset will be
overstated because increase in accumulated depreciation is not
recorded and deducted. Therefore, total assets also would be
overstated. It will not cause any change to total liability in the
balance sheet. Hence, option (b) is also wrong.
So the correct answer is, Total assets will be overstated (too
high) at the end of the current year.