Accrued salaries owed to employees for October 30 and 31 are not considered in preparing the financial statements for the year ended October 31. Indicate which items will be erroneously stated, because of the error, on (a) the income statement for the year and (b) the balance sheet as of October 31. Also indicate whether the items in error will be overstated or understated.
Answer:
a. Salary expense (or expenses) will be understated. Net income will be overstated.
b. Salaries payable (or liabilities) will be understated. Owner’s equity will be overstated.