Question

Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause:A)net income to be overstated.B)an understatement of assets and an understatement of revenues.C)an understatement of revenues and an understatement of liabilities.D)an understatement of revenues and an overstatement of liabilities.

Answer 1

Answer:

B) An understatement of assets and understatement of revenues

Explanation:

Accrued revenues are revenues that are earned but are still collectible.

That means the adjusting entry should have been:

Debit to Accounts Receivable and

Credit to Revenue

If the company failed to prepare this adjusting entry then the Accounts Receivable will not be recorded and thus will understate the Asset since Accounts Receivable is an Asset.

The same goes for revenue, if not recorded, will understate Revenue.