In: Accounting
On December 31, 2011, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work in process, what is the impact of the omission on accrued liabilities and retained earnings in the December 31, 2011 balance sheet? Liabilities Retained Earnings A.No effect No effect B.No effect Overstated C.Understated No effect D.Understated Overstated
Option c understated, no effect is the correct answer.
Explanation :
(c) A liability is accrued when an obligation to pay or perform services has been incurred. Therefore, accrued liabilities will be understated on the December 31, 2011 balance sheet because the special insurance costs were not recorded. But there will be no effect on the December 31, 2011 balance of retained earnings because these costs relate to the closing stock i.e. work in process, and change in cost of work in process due to unrecorded entry will not affect net income of the year for the company.