What are the effects on the accounting equation from the adjustment for salaries incurred but not yet paid during the accounting period?Multiple choice question.Total liabilities will increase and total stockholders' equity will increase.Total liabilities will decrease and total stockholders' equity will decrease.Total liabilities will decrease and total stockholders' equity will increase.Total liabilities will increase and total stockholders' equity will decrease.
Question
What are the effects on the accounting equation from the adjustment for salaries incurred but not yet paid during the accounting period?Multiple choice question.Total liabilities will increase and total stockholders' equity will increase.Total liabilities will decrease and total stockholders' equity will decrease.Total liabilities will decrease and total stockholders' equity will increase.Total liabilities will increase and total stockholders' equity will decrease.
Solution
The adjustment for salaries incurred but not yet paid during the accounting period will increase total liabilities and decrease total stockholders' equity.
Here's why:
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When salaries are incurred but not yet paid, they are recorded as a liability (salaries payable) on the balance sheet. This is because the company owes these salaries to its employees, making it a liability. Therefore, total liabilities will increase.
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At the same time, this increase in liabilities reduces the net income for the period because it is an expense that the company has incurred. Lower net income leads to a decrease in retained earnings, which is a part of stockholders' equity. Therefore, total stockholders' equity will decrease.
So, the correct answer is: "Total liabilities will increase and total stockholders' equity will decrease."
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