If Certain Goods Owned By An Entity Were Not Recorded As A Purchase And Were Not Counted In Ending Inventory, In Error, Then What Is The Effect On The Financial Statements? (Assuming This Is A Purchase On Account And The Entity Uses Periodic Inventory System)
If the company or entity did not recorded purchases, then it understated the purchases account in the Income Statement. The ending inventory account is also understated in income statement and on the balance sheet as well. Due to non-recording of certain purchases, accounts payable account is also understated. However, there are no effects on cost of goods sold and net income for the period as both the purchases and ending inventory accounts are understated with the equal amount, so the effect of error on the debit side (purchases is less debited with equal amount) offsets or cancels the effect of error on the credit side (ending inventory is less credited with equal amount) in the calculation of cost of goods sold. As, there is no effect on cost of goods sold, so there is also no effect on net income as the error is not carried out its effect on net income due to offsetting or cancellation. There is also no effect on Retained Earnings as there is no effect on net income and hence...