Question

If an accrued expense is not recorded at the end of the year, what is the impact on the financial statements?

Short answer

In the income statement, total expenses will be understated and net income will be overstated. In the balance shhet, liabilities will be understated and equity will be overstated.

Step-by-step solution

Step-by-Step SolutionStep 1: Explanation on Accrued Expenses

Accrued expense is the expense which is incuured but remains unpaid as on date.

Impact on Income Statement

As accrued expense are recorded it increases the expenses of the business, not recording the accrued expense will reduce the total expenses, and will increase the net income.

Impact on Balance Sheet

Unpaid expenses are reported as liabilities in the balance sheet, hence not recording accrued expense, will reduce the total liabilities. Also, as net income is increased it will increase equity too.