At the end of an accounting year, wages of Rs. 30,000 are unpaid. What is the effect of the adjusting entry?
Correct answer: C. Profit decreases and liabilities increase
- A. Assets increase and profit increases
- B. Profit increases and liabilities decrease
- C. Profit decreases and liabilities increase
- D. Liabilities decrease and expenses decrease
Explanation
The unpaid wages are an accrued expense, so they must be debited as an expense and credited as a liability. The expense reduces profit, while the accrued wages increase the amount owed.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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