Solution: A firm failed to make an adjusting entry on December 31, 2018, to accrue an expense incurred in 2018 that will be paid in January 2019. What was the effect of this error on the December 31, 2018 finan

Problem

A firm failed to make an adjusting entry on December 31, 2018, to accrue an expense incurred in 2018 that will be paid in January 2019. What was the effect of this error on the December 31, 2018 financial statements?

a. An understatement of liabilities and expenses, and an overstatement of stockholders’ equity

b. An overstatement of liabilities and assets and an understatement of expenses

c. An understatement of assets and an understatement of stockholders’ equity

d. An overstatement of liabilities and an understatement of retained earnings