Question

Sheffield Corp. earned $2120 for architecture services provided with the fee to be paid in the future. No entry was made at the time the service was provided. If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause:

a. net income to be overstated.
b. revenues to be overstated.
c. liabilities to be understated.
d. revenues to be understated.

Answer 1

Answer: If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause: "d. revenues to be understated.".

Explanation: The income would be underestimated because the income of $2120 that corresponds to the service provided in the accounting period, must be recognized in the accounting period in which the economic events occur regardless of when the income of the funds occurs (accrual principle).