Don't Miss Out on Adjusting Entries for Unused Supplies!

What happens if the appropriate adjusting entry is not made for unused supplies?

At the end of the calendar year, $2480 of supplies remained unused. If Collins Company fails to make the necessary adjusting entry, what will be the effect on:

1. Expenses

2. Assets

Effects of Not Making Adjusting Entry for Unused Supplies

1. Overstatement of Expenses

2. Understatement of Assets

The failure to make the appropriate adjusting entry for unused supplies can have significant implications on the financial reporting of a company. In the case of Collins Company, where $2480 worth of supplies remained unused at the end of the year, not making the necessary adjustment will lead to misrepresentation of expenses and assets.

Firstly, if the adjusting entry is not recorded, expenses will be overstated on the profit and loss statement. This means that the reported expenses will be higher than they actually are, resulting in a lower net profit for the company. This can mislead investors and stakeholders about the true financial performance of the company.

Secondly, the assets of the company will be understated on the balance sheet. The unused supplies should be recognized as inventory to accurately reflect the company's assets. Without the adjusting entry, the assets will be undervalued, affecting the overall financial position of the company.

It is crucial for companies to make the necessary adjusting entries for unused supplies to ensure the accuracy and transparency of their financial reports. This not only helps in presenting a true picture of the company's financial health but also builds trust with investors and stakeholders.