The accountant at Error Prone Company recorded the purchase of $300 of supplies for cash as an increase to Supplies for $300 and an increase to Accounts Payable for $300.
Determine the effect of this error on the accounting equation of Error Prone Company.
A) Total Equity would be overstated by $300
B) Total Liabilities will be understated by $300
C) Total Assets would be overstated by $300
D) Total Equity would be understated by $300

Question

Quizplus · Accepted Answer

The error resulted in recording the transaction as if it was made on credit, increasing both Supplies (an asset) and Accounts Payable (a liability) by $300. This double counts the asset increase without recognizing the cash decrease, thus overstating total assets by $300. Total liabilities and equity are not directly affected by this error in the recording of the transaction.

The Accountant at Error Prone Company Recorded the Purchase of $300