Stuck

[elaine]

yo

We were debating this question in class, and everyone came up with different outcomes.

Question:
In the previous reporting period, an adjustment for accrued expenses was recorded.
What will be the effect in the current period if no recognition is made of the previous accrued expenses?

A) Profit will be overstated
B) Profit will be unaffected but liabilities will be overstated
C) Assets will be understated
D) Profits will be understated

Give reasons for your answer

What and how do you get to the answer? I put A but that's wrong

[costargh]

B)Profit will be unaffected but liabilites will be overstated
Because, for example if wages incurred in June but not yet paid for were adjusted for, they would be used in the calculation of profit for June thus increasing the expense (decreasing Net Profit and OE) and creating a liability, "Accrued Wages" with a value of $900.

Now in the current reporting period of July if someone just forgot to recognise accrued wages as aliability it woul Understate the liabilites because their would be $900 less in liabilities (Accrued wages).

It does not affect profit because the "wages expense" was calculated in the previous reporting period.

Edit: Furthermore, your expense accounts are closed off at the end of the previous reporting period, resetting them back to $0 which is why the expense that was incurred in the previous reporting period can not affect the profit of the current reporting period.
Contrastingly, the liability account is ongoing which is why the Accrued wages (if not recognised) would be understated.

[AppleXY]

It's B for sure.

An accrued expense is an expense that is realised before it paid. As an liability is future sacrifices of economic benefits, it is thus a liability.

Therefore by not recognising the value will lead to an understatement of liabilities but will not affect the profit figure whatsoever.

[elaine]

i like your explanations, they make sense. and the accounting nerd in my class said B as well.

but the book says the answer is D! and my teacher said that's right, except he couldn't explain it to me.

oh and btw, this is from Neap in Balance Day Adjustments, Question 4

[costargh]

Correction

Neap is right

[jamesdrv]

Now in the current reporting period of July if someone just forgot to recognise accrued wages as aliability it woul Understate the liabilites because their would be $900 less in liabilities (Accrued wages).

The answer says "liabilities will be overstated", not understated.

If you don't recognize an accrued expense made in a previous period, then you will incorrectly recognize that expense in this period (i.e. when you actually pay the wages). An incorrect increase in expenses this period will result in an incorrect decrease in net profit this period. Hence, profit is understated. I'm basing this on the fact that you said the answer is D, as the question itself is not very clear. I think D is the correct answer given what the question is trying to ask.

[costargh]

Lol shit my bad.

The wording is ambigious

[elaine]

Now in the current reporting period of July if someone just forgot to recognise accrued wages as aliability it woul Understate the liabilites because their would be $900 less in liabilities (Accrued wages).

The answer says "liabilities will be overstated", not understated.

If you don't recognize an accrued expense made in a previous period, then you will incorrectly recognize that expense in this period (i.e. when you actually pay the wages). An incorrect increase in expenses this period will result in an incorrect decrease in net profit this period. Hence, profit is understated. I'm basing this on the fact that you said the answer is D, as the question itself is not very clear. I think D is the correct answer given what the question is trying to ask.

oh cool, i get it now
thanks