If A Company Fails To Adjust Accrued Expenses

If a company fails to account for Accrued Expenses or Outstanding Expenses or Expenses Payable, then the value of expenses in Income Statement decreases and as a result, the net income / net profit for the period is increased or overstated.

The effect of this non recording adjusting entry of accrued expenses is that the liabilities side decreases so total liabilities on balance decreased or understated.

In fact, we record the following accrued expenses adjusting entry in the books of accounts:

                                                             Expenses a/c  XXX

 

                                                                                     Accrued Expenses a/c  XXX

 

                                                       (Expenses Accrued but not Recorded)

 

Expenses account is increasing, so we debit it but as it is not recorded, so the value of expenses in Income Statement or Profit and Loss Account decreases and net income is overstated. Accrued Expenses account is recorded as current liability account which is increasing, so we credit it. Again, as it is not recorded, so the liability on balance sheet decreased or understated.

This also affects stockholder’s equity as due to non recording of expenses account, the equity account is overstated.