Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 67

Effect of adjustments on net income Assume that Cater Co.’s accountant neglected to record the payroll expense accrual adjustment at the end of October.

Required:

a. Explain the effect of this omission on net income reported for October.

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b. Explain the effect of this omission on net income reported for November.

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c. Explain the effect of this omission on total net income for the two months of October and November taken together.

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d. Explain why the accrual adjustment should have been recorded as of October 31.

Step 1 of 4

a.

Explain the effect of the omission on net income reported for October:

• Accounting around the world follows the accrual concept and mercantile concept of accounting and the hybrid and cash basis of accounting, both in many countries including in India. In the given question, the C Co. accountant neglected to record the payroll expenses accrual adjustment at the end of October.

• The effect of such omission/negligence on Net Income reported for the month of October was overstated by the amount of such omission while the liability of C Co. for the same period was understated by the same amount due to the accrual basis of accounting.