When the accountant for Hobson Electrical Repair Company fails to make an adjusting entry to record $5,000 of unpaid salaries, the total expenses are understated. Specifically, salaries expense should be recorded to reflect the total labor costs incurred during the accounting period.
As a consequence of this omission, both net income (on the income statement) and expenses (on the income statement) will be affected, resulting in an overstated net income since the unpaid salaries (an expense) are not being recognized. Additionally, liabilities are also understated since the company has an obligation to pay those salaries (a payable) that is not recorded.
To summarize:
- Total expenses are understated.
- Net income is overstated.
- Liabilities are understated.
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