Omitting Adjusting Entries

What happens to the Financial Statements if an adjusting entry is omitted???

This is a pretty hard question.  You have to THINK it through.  Here is how to do it:
1. Think what the adjusting entry should be
2. Think about what the result will be if it is omitted.

What will happen if the adjusting entry for supplies ($1,000) is omitted?
1. What should the adjusting entry be:

In this entry An expense is being increased and an asset is being decreased.

2. What will be the result if it is omitted?
a. Well, Since we were supposed to increase supplies expense, if we omit the entry, expenses will be Understated.
b. Since expenses are understated, Net Income will be Overstated.
c. Since Net Income is overstated, ending Retained Earnings will be Overstated.
d. Since we failed to decrease supplies, Assets will be Overstated.

Summary:
Expenses US
Net Income OS
Retained Earnings OS
Assets OS

Do you get this????

What will happen if the adjusting entry for Unearned Fees ($1,000) is omitted?

Let's take the same two steps:
1. Think what the adjusting entry should be
2. Think about what the result will be if it is omitted.

1. What should the adjusting entry be?
 

What will be the result if it is omitted?
a. Well, since we are supposed to decrease liabilities, if we omit the entry liabilities will be Overstated.
b. Since we are supposed to increase Revenue, if we omit the entry, Revenue will be Understated.
c. Since revenues are understated, Net Income will be Understated.
d. Since Net Income is Understated, Retained Earning will be Understated

You need to practice this type of thinking for all of the different adjusting entries.  Please come and see me if you need extra help!

Here is a quiz to test your understanding!

Quiz