Please explain

Question # 1494 | Blueprint Area: 3 A : Accounting Changes and Error Corrections Related Chapter: FAR-12 A: Accounting Changes and Error Correction During December of the previous year, Nile Co. incurred special insurance costs but did not record these costs until payment was made during the current year. These insurance costs related to inventory that had been sold by December 31 of the previous year. What is the effect of the omission on Nile's accrued liabilities and retained earnings at December 31 of the previous year? Retained earnings Accrued liabilities A No effect No effect 6 Understated Overstated D Understated No effect Accrual accounting recognized and reports the effects of transactions and other events on the assets and liabilities of a business enterprise in the time periods to which they relate rather than only when cash is received or paid. Accrual accounting attempts to match revenues and the expenses associated with those revenues in order to determine net income for an accounting period. The insurance costs were not recorded during the period to which they relate, so the accrued liabilities is understated. Because the expense was not included in the inventory that was sold, the COGS was less than it should have been, and as a result, the retained earnings were overstated