The accountant failed to make the adjusting entry to record the unpaid wages of its employees as of December 31. This error will cause
A) an overstatement of assets, liabilities, and shareholders' equity.
B) an understatement of expenses, liabilities, and shareholders' equity.
C) an understatement of liabilities and an overstatement of shareholders' equity.
D) an understatement of assets and liabilities.

Question

Quizplus · Accepted Answer

Failing to record unpaid wages results in not recognizing the liability for those wages, which understates liabilities. Since expenses (wages) are also understated, net income is overstated, leading to an overstatement of retained earnings and, consequently, shareholders' equity. Assets are not directly affected by this error.

The Accountant Failed to Make the Adjusting Entry to Record