ejohnson4256
Aug 31, 2011, 07:38 PM
I keep getting stuck on #5... That's all that I could come up with that made sense but I don't know how to meet the requirements of the question- impact on accounting equation, the accounts, and income... I keep confusing myself.
Can you also check the other parts and let me know if they are okay? Thanks in advance!
How would the following errors affect the account balances and the basic accounting equation, Assets = Liabilities + Owners' Equity? How do the misstatements affect income?
1. The purchase of a truck is recorded as an expense instead of an asset.
Owner's equity (retained earnings) is decreased and assets (cash) are decreased. The accounting equation is still balanced because there is an equal decrease in accounts on both sides of the equation. Income is mistakenly decreased.
2. A cash payment on accounts receivable is received but not recorded.
There is no change in the account balance or the accounting equation if no information was recorded. Assets (accounts receivable) should increase as well as owner's equity to maintain balance in the equation. Income stays the same when it should have increased.
3. Fictitious sales on account are recorded.
Overstating or fabricating revenues is unethical. Recording fictitious sales on an account will equally (but falsely) increase assets (cash) and owner's equity on the financial statements; however, the funds do not exist. The income on the financial statements is deliberately made to look like an increase to giving stockholders and other stakeholders a false sense of security that the organization is doing better than it actually is.
4. A clerk misreads a handwritten invoice for repairs and records it as $1,500 instead of $1,800.
Liabilities (accounts payable) increases $1,800, as well as a decrease of the same amount to owner's equity. The accounting equation remains balanced because there is an equal increase and decrease for $1,800 on one side of the equation. However, the recorded amount should have only been $1,500 (a difference of $300). Income is mistakenly decreased $300 more than it should have been.
5. Payment is received on December 31 for the next three months' rent and is recorded as revenue.
Transfers liability to owner to provide living space for the next three months.
Can you also check the other parts and let me know if they are okay? Thanks in advance!
How would the following errors affect the account balances and the basic accounting equation, Assets = Liabilities + Owners' Equity? How do the misstatements affect income?
1. The purchase of a truck is recorded as an expense instead of an asset.
Owner's equity (retained earnings) is decreased and assets (cash) are decreased. The accounting equation is still balanced because there is an equal decrease in accounts on both sides of the equation. Income is mistakenly decreased.
2. A cash payment on accounts receivable is received but not recorded.
There is no change in the account balance or the accounting equation if no information was recorded. Assets (accounts receivable) should increase as well as owner's equity to maintain balance in the equation. Income stays the same when it should have increased.
3. Fictitious sales on account are recorded.
Overstating or fabricating revenues is unethical. Recording fictitious sales on an account will equally (but falsely) increase assets (cash) and owner's equity on the financial statements; however, the funds do not exist. The income on the financial statements is deliberately made to look like an increase to giving stockholders and other stakeholders a false sense of security that the organization is doing better than it actually is.
4. A clerk misreads a handwritten invoice for repairs and records it as $1,500 instead of $1,800.
Liabilities (accounts payable) increases $1,800, as well as a decrease of the same amount to owner's equity. The accounting equation remains balanced because there is an equal increase and decrease for $1,800 on one side of the equation. However, the recorded amount should have only been $1,500 (a difference of $300). Income is mistakenly decreased $300 more than it should have been.
5. Payment is received on December 31 for the next three months' rent and is recorded as revenue.
Transfers liability to owner to provide living space for the next three months.