Question

Identify the impact on the income statement and balance sheet if adjusting entries for the following situations were not recorded. a. Office Supplies used, \(800. b. Accrued service revenue, \)4,000. c. Depreciation on building, \(3,500. d. Prepaid Insurance expired, \)650. e. Accrued salaries expense, \(2,750. f. Service revenue that was collected in advance has now been earned, \)130

Short answer

In the balance sheet, salaries payable will be understated and equity will be overstated. And in the income statement, salaries expense will be understated and net income will be overstated.

Step-by-step solution

Impact on Income Statement

Accrued salaries used are the part of the expenses of the business, hence not recording the adjusting entries will reduce the salaries expense and therefore result in increase in net income.

Impact on Balance Sheet

Accrued salaries expense should be included in the current salaries expense, not recording adjusting entries will decrease the salaries payable balance in liability section. As net income is increases, it will also increase equity (Retained earnings).