Question

What would be the impact on net income if the adjusting entry was not recorded?

Prepaid Expenses

Depreciation

Accrued Expense

Accrued Expense

Accrued Revenue

Answer 1

Solution

	Effect on net Income
Prepaid Expenses	Overstated
Depreciation	Overstated
Accrued Expense	Overstated
Accrued Expense	Overstated
Accrued Revenue	Understated

If prepaid expense are not adjusted for decreasing prepaid expense and recording expired portion of prepaid expense then total expense would be understated and income will be overstated.

Similarly Depreciation and not recording accrued expense will understate expense and overstate net income.

Not recording accrued revenue will understate revenue and hence it understate net iccome.