Winchester Publishing Inc began its business on January 1, 2010. Assume annual accounting periods ending December 31. It is now December 31, 2010. No year-end adjusting entries have been made. During the year, office supplies totaling $7,200 were purchased and debited to the Office Supplies Expense account. At the end of 2010, $1,100 of office supplies remained unused.
If no year-end adjusting journal entry is made at the end of 2010, describe the effect (overstatement, understatement, no effect) and dollar amount of any effect
on total assets and total stockholders’ equity.
total assets will be understated
expense is recoreded with full amount and expense for the year is not full.. so profit means equity is understated by 1100..
In substance, Office supplies can’t be considered assets, but are expenses incurred in the ordinary course of Winchester business activities. As a Publishing firm, current assets may include various parts for the printing machinery and equipment, paper, printing ink, etc.
Well, you may argue being a publishing firm, such supplies contribute indirectly to the creation of goods i.e. books, magazine, etc, that ultimately contribute cashflows to the enterprise. If that’s the case, office supplies in advisory firms’ can be classified as current assets when they are incurred because they indirectly contribute to the service to the rendered to the clients. (i.e. craft ideas and strategies, produce draft reports.). They are not, but are classified under Adminstrative expenses.
However, due to the matching concept where actual office supplies expense used was $6100, the remainder $1100 hence can be termed as an asset, because it is now a resource whose economic benefits was paid for but not used up at the end of the reporting period. It is classified as prepaid expenses under current assets.
Total Assets understated.
Retained Earnings in equity understated.
after journal adjustments
Dr Prepaid Office Supplies Exp $1100
Cr Office Supplies Exp $1100
Hence there will be a corresponding increase of $1100 in total assets and equity, i.e. retained earnings.
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