The auditors informed the company that the provision for long service leave was understated by $100 000 at 30 June 2019 and that the account should be adjusted. The effect of the adjustment would be:
A) liabilities increase and profit decreases.
B) liabilities increase but profit is unaffected.
C) profit increases but there is no effect on liabilities.
D) there is no effect on either profit or liabilities.

Question

Quizplus · Accepted Answer

If the provision for long service leave is understated, it means that the amount that should have been set aside for this obligation was not recorded. Therefore, adjusting the account by adding $100 000 will increase the liabilities of the company because it owes this amount to the employees as a long service leave entitlement. At the same time, profit will decrease because the company has to recognize this expense in the income statement for the year ended 30 June 2019. Therefore, the correct answer is A, as it reflects the dual effect of the adjustment on the financial statements.

The Auditors Informed the Company That the Provision for Long