Sienna Maggio
Jan 17, 2025
Failure to record a liability will probably?
What are the potential consequences of failing to record a liability? Specifically, could this oversight lead to overstated net income, overstated liabilities and owners' equity, have no effect on net income, or result in overstated total assets?
2 Answers
Remember A=L+OE
It could result in an overstated net income, but indirectly. Liabilities are usually matched with expenses, but somehow I doubt that's what they're looking for.
It wouldn't result in overstated Liab and OE because they would actually be understated
I feel most confident with this answer, but the same logic could apply from the first answer to this.
If you fail to record a liablity, liabilities would be understated. Therefore assets would be understated. This is not the correct answer.
This is really a poor question for your teacher to quiz you on since it's very vague. I think your teacher is asking what statement liabilities show up on (the Balance Sheet) and the directions for B and D are clearly wrong. So my answer is C. But it's a bogus question.
Well, it COULD be the first one, but ONLY if the associated expense isn't recorded, which is not identified in this question so we can NOT assume it.
next, well if a liability isn't recorded, liabilities will be UNDERSTATED. The second says liabilities will be Overstated, which is wrong obvioulsy.
have no effect on net income??? Well in essence this one is most likely correct, because liabilities in and of themselves are a balance sheet item that don't affect the income statement !!!! This is the MOST correct answer.
Failure to record a liability will NOT result in overstated assets
I agree with the first guy...the question is a bit bogus...
If it is a written answer, qualify your answer by stating what I did, that liabilities in and of themselves do NOT affect the income statement. HOWEVER, if the associated EXpense was also not recorded, then the net income will be overstated. And since the net income is overstated, the retained earnings will also be overstated.
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