If the accountant for Jones Auto Repair Company forgot to make an adjusting entry to record $5,000 of accrued wages at year-end, then its liabilities are understated and expenses are also understated.
Specifically:
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Liabilities: Accrued wages are considered a liability because they represent an obligation to pay employees for work they have already performed. By not recording this $5,000, the liabilities are overstated (since they do not reflect the actual amount owed).
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Expenses: The wages incurred but not yet paid are an expense for the period. If this amount is not recorded, it keeps the total expenses reported lower than they should be, leading to an overstatement of net income.
In summary, both liabilities are understated and expenses are understated due to the failure to record the accrued wages.
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