Anchor Company sold merchandise with a cost of $560 to a customer for $890 on account. Due to an error, neither part of the related two-part transaction was recorded in the accounting records. What effect will the failure to make the necessary entries have on the company's financial statements?

Question

Quizplus · Accepted Answer

The failure to record the transaction will result in an understatement of both total assets and total stockholders' equity. This is because the transaction would have increased both the accounts receivable (an asset) and retained earnings (a stockholders' equity account), but without recording it, these accounts are not reflecting the actual values.

Anchor Company Sold Merchandise with a Cost of $560 to a Customer