A calendar year company plans to pay its December gas bill in January. As of Dec

Question

A calendar year company plans to pay its December gas bill in January. As of December 31, no adjusting entry has been recorded. As a result, the balance sheet is accurate, but the income statement is understated net income is understated and liabilities are overstated net income is overstated and liabilities are overstated net income is understated and liabilities are understated the income statement and the balance sheet are both accurate because the bill won't be paid until January net income is overstated and liabilities are understated

Explanation / Answer

Since the expense is relating to December, it should be recorded in December resulting in increase in expenses and since it is not paid in December, it will increase the current liabilities

The Journal Entry will be

Gas Expenses   (Expenses)

    Outstanding Expenses (Current liability)

So, as per above discussion, net income is overstated as the expense has not been recorded yet in December and liabilities are understated as the liability has not yet been recognized

So, as per above discussion, last option is the correct option

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