Question

A company pays its employees every Friday. This year, the company’s year ends on a Wednesday....

A company pays its employees every Friday. This year, the company’s year ends on a Wednesday. If it does not to accrue salaries for the week, how will the financial statements be affected? net income will be overstated; assets will be overstated; liabilities will not be affected net income will be understated; assets will not be affected; liabilities will be overstated net income will be understated; assets will be understated; liabilities will not be affected net income will be overstated; assets will not be affected; liabilities will be understated

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Answer #1

We pass following entry when we accrue salaries

Debit Credit
Salary & wage expense XXXX
Salaries & wages payable XXX

Salary & wage expense is reported in income statement thus not accruing it will overstate the income (as expense are understated)

Salaries and wages payable is a balance sheet item(liabilities)thus liabilities will be understated

There will be no affect on assets .

So

  1. Net income will be overstated
  2. liabilities will be understated
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