As of January 31, Princess Company owes $500 to Butler Co. for equipment rented during January. If no adjustment is made for this item at January 31, how will Princess's financial statements be affected?

Question

Quizplus · Accepted Answer

If no adjustment is made, the expense for the equipment rented in January will not be recognized, which means that the profit for January will be overstated. The $500 owed to Butler Co. should be recognized as an expense in January, which will decrease the profit and the equity. However, the cash account will not be affected until the payment is made.

As of January 31, Princess Company Owes $500 to Butler