What is a consequence of not recording accrued expenses?

What is a consequence of not recording accrued expenses?

• A. Assets are overstated
• B. Liabilities are overstated
• C. Net income is understated
• D. Net income is overstated

Answer: (D)

When accrued expenses are not recorded, it leads to an overstatement of net income. Accrued expenses represent costs that a company has incurred but has not yet paid or recorded in the accounts. By failing to recognize these expenses, the company's financial statements reflect higher profits than they should, as the expenses that would normally reduce net income are missing from the records. This situation indicates that expenses are understated, leading to an inflated profit figure. Overstated net income can mislead stakeholders, such as investors or management, about the company's financial health, resulting in poor decision-making based on erroneous financial data. Properly recording accrued expenses ensures that financial statements accurately depict the company's performance and compliance with accounting principles.

When accrued expenses are not recorded, it leads to an overstatement of net income. Accrued expenses represent costs that a company has incurred but has not yet paid or recorded in the accounts. By failing to recognize these expenses, the company's financial statements reflect higher profits than they should, as the expenses that would normally reduce net income are missing from the records.

This situation indicates that expenses are understated, leading to an inflated profit figure. Overstated net income can mislead stakeholders, such as investors or management, about the company's financial health, resulting in poor decision-making based on erroneous financial data. Properly recording accrued expenses ensures that financial statements accurately depict the company's performance and compliance with accounting principles.