1. Effect of Omitting Adjustments
Example Exercise 3-8
Effect of Omitting Adjustments
In this example exercise, we need to determine the amount that revenue, expenses and ultimately net income would be overstated or understated due to mistakenly omitting adjusting entries.

2. Effect of Omitting Adjustments
Example Exercise 3-8
Effect of Omitting Adjustments
The first omitted adjusting entry is for $8,600 of unearned revenue that was earned during the period but not yet recognized as revenue because no cash has been received. This type of adjusting entry is an [CLICK] accrued revenue. Since the adjusting entry was not recorded, revenue was understated by $8,600 [CLICK].
Accrued Revenue
(a) Revenue was understated by $8,600.

3. Effect of Omitting Adjustments
Example Exercise 3-8
Effect of Omitting Adjustments
The second omitted adjusting entry is for $12,500 of revenue that was earned during the period but not recorded. This type of adjusting entry is an accrued revenue adjustment. Since the adjusting entry was not recorded, revenue is understated by $12,500 [CLICK] .
Accrued Revenue
(a) Revenue was understated by $12,500.

4. Effect of Omitting Adjustments
Example Exercise 3-8
Effect of Omitting Adjustments
The third omitted adjusting entry is for $2,900 of wages that were earned by employees but not yet paid or recorded. This type of adjusting entry is an accrued expense. Since the adjusting entry was not recorded, expenses were understated by $2,900 [CLICK] .
Accrued Expense
(b) Expenses were understated by $2,900.

5. Effect of Omitting Adjustments
Example Exercise 3-8
Effect of Omitting Adjustments
Now, let’s complete parts (a) through (c) of the example exercise by indicating the combined effect of the errors on revenues, expenses, and net income.

6. Effect of Omitting Adjustments
Example Exercise 3-8
Effect of Omitting Adjustments
(a)
The net effect of omitting these adjustments is an understatement to net income of $18,200.
(b)
(c)
$8,600 + $12,500

7. Example Exercise 3-8  For Practice: PE 3-8A, PE 3-8B
Refer to Practice Exercise PE 3-8A and PE 3-8B for more practice with the effect of omitting adjustments.
 For Practice: PE 3-8A, PE 3-8B