Question

The accountant failed to make the adjusting entry to record the unpaid wages of its employees as of December 31. This error will cause

an understatement of liabilities and an overstatement of shareholders' equity.

an overstatement of assets, liabilities, and shareholders' equity.

an understatement of expenses, liabilities, and shareholders' equity.

an understatement of assets and liabilities.

Answer 1

--When adjustment entry is made for unpaid wages,
>wages expenses (an expense) is debited, which increases the expenses.
>Wages payable (a liability) is credited, which increase the liability.

--When the above entry will NOT be made:
>Expenses will be omitted = understated expense = overstated Net Income = overstated Retained earnings and Stockholder's Equity.
>Liabilities will not be credited which will lead to understatement of Liabilities.

--Correct Answer = Option 'a' an understatement of liabilities and an overstatement of shareholders' equity.