Effects of Errors During the current accounting period, Page Company makes the following errors. The company uses a perpetual inventory system.
Net Total Total Total
Income Assets Liabilities Shareholders'
Error Equity
Example: Failed to record a cash sale: U U N U
1. The purchase of equipment for cash is
recorded as a debit to Equipment and a
credit to Accounts Payable.
2. Failed to record the purchase of inventory
on credit.
3. Cash received from a customer in payment
of its account is recorded as if the receipt were
for a current period sale.
4. Failed to record a credit sale.
5. At the end of the year, the receipt of money
from a 60-day, 12% bank loan is recorded as
a debit to Cash and a credit to Sales Revenue.
6. Failed to record depreciation at the end of the
current period.
Required:
Indicate the effect of each error on the net income, total assets, total liabilities, and total shareholders' equity at the end of the accounting period by using the following code: O = overstated, U = understated, N = no effect. Disregard income taxes.

1. The purchase of equipment for cash is  recorded as a debit to Equipment and a  credit to Accounts Payable.

Net income: N

Total assets: O (when equipment is purchased for cash, cash decreases and equipment increases in the same amount, so the net effect on assets is $0, but if accounts payable is credited, then cash will be overstated)

Total liabilities: O

Total shareholders' equity: N

2. Failed to record the purchase of inventory  on credit.

Net income: O (since cost of goods sold will be understated)

Total assets: U (inventory)

Total liabilities: U (accounts payable)

Total shareholders' equity: O (since net income is overstated, retained earnings will be overstated also)

cost of goods sold = purchases - inventory, even if the company uses a perpetual inventory system, not recording the purchase of inventory will result in an understatement of COGS.

3. Cash received from a customer in payment of its account is recorded as if the receipt were  for a current period sale.

Net income: O (revenues are recognized when they occur, not when the cash is collected)

Total assets: N

Total liabilities: N

Total shareholders' equity: O (since net income is overstated, retained earnings will be overstated)

4. Failed to record a credit sale.

Net income: U (when you fail to record a sale, net income is understated)

Total assets: U (assuming that the sales price was higher than the cost of goods sold, then accounts receivable should have increased more than inventory's decrease)

Total liabilities: N

Total shareholders' equity: U (since net income is understated, retained earnings will be understated)

5. At the end of the year, the receipt of money  from a 60-day, 12% bank loan is recorded as  a debit to Cash and a credit to Sales Revenue.

Net income: O (since sales revenue increased by mistake, net income will be overstated)

Total assets: N

Total liabilities: U (a bank loan is a liability)

Total shareholders' equity: O (since net income is overstated, retained earnings will be overstated)

6. Failed to record depreciation at the end of the  current period.

Net income: O (depreciation is an expense account and not recording it will overstate net income)

Total assets: O (the net carrying value of the fixed assets will be overstated)

Total liabilities: N

Total shareholders' equity: O (since net income is overstated, retained earnings will be overstated)

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