The omission of the adjusting entry to record depreciation expense will result in an:
A) overstatement of assets and an overstatement of equity.
B) understatement of assets and an understatement of equity.
C) overstatement of assets and an overstatement of liabilities.
D) overstatement of liabilities and an understatement of equity.

Question

Quizplus · Accepted Answer

Failing to record depreciation expense leads to an overstatement of assets (since the asset's book value is not reduced) and an overstatement of equity (since expenses reduce net income and, consequently, retained earnings, part of equity).

The Omission of the Adjusting Entry to Record Depreciation Expense