Question

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not
recorded.
a. Office Supplies used, $800.
b. Accrued service revenue, $4,000.
c. Depreciation on building, $3,500.
d. Prepaid Insurance expired, $650.
e. Accrued salaries expense, $2,750.
f. Service revenue that was collected in advance has now been earned, $130

Answer 1

	Income statement	Balance sheet
a	Supplies Expense understated	Office Supplies overstated
	Net income overstated	Equity overstated
b	Service Revenue understated	Accounts Receivable understated
	Net income understated	Equity understated
c	Depreciation Expense understated	Accumulated Depreciation understated making total assets overstated
	Net income overstated	Equity overstate
d	Insurance Expense understated	Prepaid Insurance overstated
	Net income overstated	Equity overstated
e	Salaries Expense understated	Salaries Payable understated
	Net income overstated	Equity overstated
f	Service Revenue understated	Unearned Revenue overstated
	Net income understated	Equity understated

 

Explanation

a: office supplies used is an expense that reduces the net income. Not recording expense overstates net income. net income further added to retained earnings which are part of equity. Thus increase in net income overstates equity.

b. Accrued service revenue is income that increases the net income. 

Accounts receivable is a current asset that is understated.

c. Not recording expense overstates net income. net income further added to retained earnings which are part of equity. Thus increase in net income overstates equity. Also accumulated depreciation is reported in the balance sheet as a negative item.

d. Expired prepaid insurance is an expense. Not recording expense overstates net income. net income further added to retained earnings which are part of equity. Thus increase in net income overstates equity

e. Accrued salaries expense is an expense. Not recording expense overstates net income. net income further added to retained earnings which are part of equity. Thus increase in net income overstates equity. when recording accrued expense payable account is also created.

f. Service revenue is an income. Not recording income understates net income. net income further added to retained earnings which are part of equity. Thus the decrease in net income understates equity.

Not recording income understates net income. net income further added to retained earnings which is part of  equity. Thus decrease in net income understates equity.