At August 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted

At August 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for August and (b) the balance sheet as of August 31? Also indicate whether the items in error will be overstated or understated.

Answers:

a. Insurance expense (or expenses) will be understated. Net income will be overstated.

b. Prepaid insurance (or assets) will be overstated. Owner’s equity (Owner’s Capital) will be overstated.