Understanding the Impact of Unrecorded Balance Day Adjustments on Financial Statements

accounting adjustments balance sheet rent expense prepaid rent profit equity financial statements balance day adjustment

State the impact on the asset, expense accounts, profit and the equity account if the following adjustment was NOT RECORDED as a balance day adjustment at 30 June 2024 General Journal (Extract) at 30 June 2024 DR: Rent $4,000 CR: Prepaid rent $4,000 Group of answer choices Rent expense would be UNDERSTATED, profit OVERSTATED, Equity OVERSTATED and Prepaid rent OVERSTATED. Rent expense would be OVERSTATED, profit UNDERSTATED, Equity UNDERSTATED and Prepaid rent UNDERSTATED. Rent expense would be UNDERSTATED, profit OVERSTATED, Equity OVERSTATED and Prepaid rent UNDERSTATED. Rent expense would be UNDERSTATED, profit OVERSTATED, Equity OVERSTATED and Prepaid rent UNDERSTATED.

Rent expense would be UNDERSTATED, profit OVERSTATED, Equity OVERSTATED and Prepaid rent OVERSTATED.

If the adjusting journal entry for the expired rent of $4,000 was not recorded as a balance day adjustment on 30 June 2024, it means that the expense for the period would not have been recognized. As a result, Rent expense would be UNDERSTATED for the period, since it would not reflect the full amount of rent that should have been expensed. This would lead to profit being OVERSTATED, as expenses are lower than they should be, thus increasing net income.

Additionally, Equity would also be OVERSTATED because the retained earnings or profit for the period would be higher due to the underreported expense. Lastly, Prepaid rent would be OVERSTATED on the balance sheet, as it would still show the full amount instead of being reduced by the expired portion, which should have been recognized as an expense.

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