An entity pays wages on a fortnightly basis and the next payroll date is 8 September.If wages expense is not accrued at 31 August the effect on the financial statements for August will be:
A) an overstatement of assets and profit.
B) an understatement of assets and profit.
C) an understatement of liabilities and an overstatement of profit.
D) an overstatement of liabilities and an understatement of profit.

Question

Quizplus · Accepted Answer

Accruing wages expense increases liabilities (for wages payable) and decreases profit (due to the expense recognition). If wages are not accrued, liabilities will be understated (because the owed wages are not recorded) and profit will be overstated (because the expense has not been recognized).

An Entity Pays Wages on a Fortnightly Basis and the Next