Failure to make a necessary adjusting entry for accrued interest on a note payable would cause which of the following?
A) An understatement of liabilities and shareholders' equity.
B) An overstatement of profit, an understatement of liabilities, and an overstatement of shareholders' equity.
C) Profit to be understated and liabilities to be understated.
D) Profit to be overstated and assets to be understated.

Question

Quizplus · Accepted Answer

Failure to make an adjusting entry for accrued interest on a note payable would result in an overstatement of profit because interest expense is not recorded, an understatement of liabilities because the full amount of the note payable is not reported, and an overstatement of shareholders' equity because net income is overstated.

Failure to Make a Necessary Adjusting Entry for Accrued Interest