Recently, The Bon Appetite Café contracted and paid for a relatively expensive advertisement in Haute Cuisine magazine. Despite the fact that the ad will appear in Haute Cuisine three months after the end of Bon Appetite Café's current fiscal year, the Cafe's accountant recorded the advertising expense when the payment was made. If no adjusting entry is made, how will this year's financial statements of Bon Appetite Café be affected?

Question

Quizplus · Accepted Answer

The expense was recorded in the current year, reducing profit, but the benefit (ad) will occur in the next fiscal year. The payment reduces cash (an asset), so total assets are understated.

Recently, the Bon Appetite Café Contracted and Paid for a Relatively