On July 1, Saboni paid $48,000 for a two-year insurance policy, debiting Prepaid Insurance for the full amount. If the adjusting entry is not made at December 31, the end of the accounting period, how does the error affect this year's financial statements?

Question

Quizplus · Accepted Answer

The adjusting entry would increase expenses and decrease assets, therefore assets are overstated and expenses are understated.

On July 1, Saboni Paid $48,000 for a Two-Year Insurance