What consequence occurs if an adjustment for expired insurance is overlooked?

If an adjustment for expired insurance is overlooked, expenses will be understated, which can lead to inflated net income. When an insurance policy is purchased, it is initially recorded as an asset under prepaid insurance. As time passes and the insurance coverage is utilized, a portion of that prepaid insurance becomes an expense. If this adjustment is not made, the expense related to the expired insurance is not recognized in the financial statements.

By not recording the expense, total expenses will appear lower than they truly are. This understatement of expenses means that net income is reported at a level that does not accurately reflect the company's financial performance. Such an inflation of net income can mislead stakeholders about the profitability of the business, resulting in potentially poor decision-making based on inaccurate financial information. This emphasizes the importance of making accurate adjusting entries to ensure financial statements present a true and fair view of the company's financial situation.