What is the effect of failing to record salaries that are earned but not paid at the end of an accounting period?

• A. Understatement of Expenses for the Period
• B. Overstatement of Expenses for the Period
• C. Understatement of Assets for the Period
• D. Overstatement of Liabilities for the Period

Answer: (A)

Salaries earned but not paid at period end must be recognized as an expense and as a liability (accrued salaries payable) because the cost was incurred in the period even though cash hasn’t yet gone out. If you don’t record this accrual, the period’s expenses come out too low, since the payroll cost isn’t included. The related liability would also be understated. Among the given options, the direct effect to the period’s financial statements is an understatement of expenses for the period. (Note: net income would be overstated as a result, and liabilities would be understated as well, but the option that describes the immediate impact on the period’s expenses is the best choice.)