If an entity fails to accrue expenses at year end, the net income is:Group of answer choicesOverstatedUnderstatedUnaffectedconverted into net loss PreviousNext
Question
If an entity fails to accrue expenses at year end, the net income is:
- Group of answer choices
- Overstated
- Understated
- Unaffected
- Converted into net loss
Solution
If an entity fails to accrue expenses at year end, the net income is overstated.
Here's why:
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Accrued expenses are those expenses that have been incurred, but not yet paid.
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At the end of the accounting period, companies should record all expenses they have incurred during the period but have not yet paid, which is known as accrual basis of accounting.
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If a company fails to accrue expenses, those expenses will not be reported in the financial statements of the period in which they are incurred.
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This will result in higher net income for the period because expenses are understated.
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Therefore, the net income is overstated.
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