Question

The adjusting entry for accrued fees was omitted at July 31, the end of the current year.

Answer 1

Answer:

a. Fees earned (or revenues) will be understated. Net income will be understated.

b. Accounts (fees) receivable (or assets) will be understated. Owner’s equity will  be understated.

Both options are right.

Explanation:

For fees earned but yet to be received, the entries required are

Debit Accounts receivable

Credit Revenue account

The accounts receivable is a balance sheet item (an asset) while the Revenue account is a p/l item.

Hence where accrued fees was omitted at July 31, the end of the current year, Fees earned (or revenues) will be understated. Net income will be understated resulting in an understatement of retained earnings and invariably owner's equity.

Also, Accounts (fees) receivable (or assets) will be understated. Owner’s equity will  be understated.

Answer 2

Answer:

a) Fees earned (or revenues) will be understated. Net income will be understated.

b) Accounts (fees) receivable (or assets) will be understated. Owner’s equity will

be understated.

Explanation:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition, principle and expense recognition principle.

All adjusting entries affect at least one income statement account (revenue or expense), and one statement of position account (asset or liability).