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At the end of the fiscal year, the following adjusting entries were omitted:

a. No adjusting entry was made to transfer the $3,000 of prepaid insurance from the asset account to the expense account.
b. No adjusting entry was made to record accrued fees of $500 for services provided to customers.

Assuming that financial statements are prepared before the errors are discovered, indicate the effect of each error, considered individually, by inserting the dollar amount in the appropriate spaces.

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Answer:

Error A

Assets will be Overstated by $3,000

Asset was never subtracted from assets so assets are overstated

Liabilities - No effect

Net Income - Overstated by $3,000

As insurance expense was not deducted from Net Income

Retained Earnings - Overstated by $3,000

As insurance expense was not deducted from Net Income

Error B

Assets - Understated by $500

Accrued revenue is an asset and so not recording it understates assets

Liabilities - No effect

Net Income - Understated by $500

This is revenue so not recording it would reduce net income.

Retained Earnings - Understated by $500

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