| Author |
|
lovethepirk
Major Contributor
Joined: 10 Jul 2009
Online Status: Offline
Posts: 295
|
| Posted: 15 Sep 2009 at 21:30 | IP Logged
|
|
|
I wanted to ask two questions and the first might help me understand this. The first question is VERY general and it confuses me a lot right now.
It has to do with if a company misses an accrued expense(wage ex.) and the how it affects the next years accounts.
1)Here we are making an adjustment b/c we haven't paid out employees for December yet as of Dec. 31st:
Wages expense.......xxxx
Wages Payable..........xxxx
I see that we are going to have on the financial statement balance sheet at year end a liabilty of xxxx. But how is this accounted for on the asset side? I thought wages expense is a nominal(temporary account) that is zeroed out by transferring it to the income statement and it begins a new life the next year. I don't really remember seeing 'wages expense' on balance sheets or is it actually on there?
2)When a company misses a wage expense I understand all but the bold:
................................year 1..................year2
Wage expense.............Understated..........Overstated
Net Income.................Overstated...........Understated
Wages Payable............Understated..........Correct
Retained Earnings.........Overstated...........Correct
After writing this and really thinking, I have come to this conclusion which may be correct. We are missing an amout of money we owe employees starting the next year. When they come beating down the CEO's door to get paid in January, he has to pay them and does this:
Wages Expense..........xxxx
Cash...........................xxxx
So Wages Payable isn't touched. And if we didn't forget to accrue these wages the prior year we would have done this in Decemeber and January respectively:
Wages Expense.........xxxx
Wages Payable.............xxxx
Wages Payable..........xxxx
Cash...........................xxxx
So the Wages Payable is touched but is zeroed out and basically acts as if nothing happened to it.
Am I correct? Thanks for reading and commenting.
|
| Back to Top |
|
| |
Zeratul
Major Contributor
Joined: 11 Jun 2009
Online Status: Offline
Posts: 987
|
| Posted: 15 Sep 2009 at 22:27 | IP Logged
|
|
|
1) Wages Expense, as you noted, is not on the asset side. It's an expense, so it hits the income statement, which ultimately hits retained earnings. So you can think of it as liabilities being understated and S/E being overstated.
2) While the wages may not necessarily be paid in January, it is the case that certainly it will not be payable (i.e. will have been paid) by the end of the next year. The main issue is that the expense will not have been recognized when incurred.
|
| Back to Top |
|
| |
lovethepirk
Major Contributor
Joined: 10 Jul 2009
Online Status: Offline
Posts: 295
|
| Posted: 15 Sep 2009 at 22:47 | IP Logged
|
|
|
Zeratul wrote:
1) Wages Expense, as you noted, is not on the asset side. It's an expense, so it hits the income statement, which ultimately hits retained earnings.
|
|
|
Bam!!!! You cleared it up with that statement thanks Zeratul! Damn that was bugging me. Sweet!
|
| Back to Top |
|
| |
lovethepirk
Major Contributor
Joined: 10 Jul 2009
Online Status: Offline
Posts: 295
|
| Posted: 16 Sep 2009 at 10:00 | IP Logged
|
|
|
Same topic when a company omits an deferral: I don't understand the bold:
.................................year 1..................year2
Revenue(unearned).......Overstated............Understated
Net Income..................Overstated............Understated
Liability(un. rev.)...........Understated..........Correct
Retained Earnings..........Overstated............Correct
If we omit deferred revenue we are missing this:
Cash......................xxxx
Unearned revenue...............xxxx
I am confused why this causes Revenue(unearned) to be higher. The affect omitting the above journal entry seems to just reduce cash and reduce a liability, revenues don't seem to factor in.
And same thing kinda for omitting a prepaid asset(defered expense):
If prepaid asset is understated(omitted) how is Insurance Expense overstated given we are missing this entry:
Prepaid insurance..............xxxx
Cash....................................xxxx
If we had remembered that entry we would later do this:
Insurance Expense............xxxx
Prepaid Insurance...................xxxx
But we DID forget the prepaid Insurance so how is the expense overstated when there isn't an expense?
I think my two confusions are related here, and I think I am thinking correctly but on the wrong path.
|
| Back to Top |
|
| |
Active Topics 
Memberlist 
Search 
Help
Register 
Login
Topic: accounting error confusion
Topic Closed)
