X Company prepares monthly financial statements. It rents space in a large offic

Question

X Company prepares monthly financial statements. It rents space in a large office complex. On May 1, it paid rent for May and June. The accountant made the proper entry on May 1 but failed to make the proper adjusting entry on May 31. What was the effect on the May financial statements?

Total equities on May 31 were overstated; total expenses for May were understated.
Total equities on May 31 were understated; total expenses for May were overstated.
Total equities on May 31 were overstated; total expenses for May were overstated.
Total equities on May 31 were understated; total expenses for May were understated.
Total equities on May 31 were correct; total expenses for May were overstated.
Total equities on May 31 were correct; total expenses for May were understated.

Explanation / Answer

Answer:-

For example, a company reports that its prepaid insurance is $8,000. However, the true or correct amount of prepaid insurance is only $7,000. The accountant will say that the reported amount for prepaid insurance is overstated by $1,000.

Because of double-entry accounting or bookkeeping, another general ledger account will also have a reporting error. In our example, if Prepaid Insurance is overstated (too much being reported) it is likely that Insurance Expensewill be understated (too little is being reported)

so here 1ST entry accountant passed prepaid rent for may and june

and forget to pass adjustement entry for may rent

so Rent expense for the month of MAY = Understated.

as expense understated Profits Overstated and;

Profits are part of Equity so Equity will be Overstated

Option - Total equities on May 31 were overstated; total expenses for May were understated.

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