Question

Analyzing the effect of prior-period adjustments

Taylor Corporation discovered in 2019 that it had incorrectly recorded in 2018 a cash payment of \(70,000 for utilities expense. The correct amount of the utilities expense was \)35,000.

Requirements

1. Determine the effect of the error on the accounting equation in 2018.

Short answer

In 2018 the error overstated utilities expense by $35,000 due to which Owner’s equity is understated by $35,000.

Step-by-step solution

Basic Introduction

The accounting equation expresses that a corporation's total assets are equal to the sum of liabilities and shareholders' equity of the corporation.

The effect of the error on the accounting equation

Utilities expense is overstated by $35,000

Net income is understated by $35,000

Owner’s equity is understated by $35,000