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If the month-end adjusting entry to record supplies used were omitted, what would be the effect on the financial statements?
AAssets understated and net profit understated
BAssets overstated and net profit overstated
CLiabilities overstated and net profit understated
DAssets overstated and net profit understated
Answer & Solution
Correct answer: B. Assets overstated and net profit overstated
1. Omitting the entry leaves Supplies (an asset) too high, so assets are overstated.
2. Supplies Expense would be too low, so it is not deducted, leaving net profit too high.
3. The overstated profit closes to equity, overstating equity too.
4. Therefore B is correct; the other options misstate at least one of the two effects.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §2.3.1 "Supplies—Deferred Expense", p.62_
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