Final answer:
The statement that unearned revenue is a liability needing adjustment at the end of an accounting cycle is true. It represents obligations for future service or product delivery and must be adjusted as the company earns the revenue. This ensures accurate financial reporting and maintains the accounting equation balance.
Step-by-step explanation:
The statement that unearned revenue is a liability account that normally needs to be adjusted at the end of an accounting cycle is true. Unearned revenue represents money received by a company for goods or services that haven't yet been delivered or performed, which is a common scenario for many businesses. It is recorded on the company's balance sheet as a liability because it reflects an obligation to deliver products or perform services in the future. The adjustment of unearned revenue typically involves recognizing the portion of the revenue that has been earned during the accounting period, which decreases the liability and increases revenue on the income statement.
In the context of a T-account, which separates a firm's assets from its liabilities, unearned revenue would be listed on the liabilities side. Over time, as the company fulfills its obligations to provide goods or services, the unearned revenue account balance decreases, and the revenue account balance increases. This dual effect ensures that the accounting equation, where assets equal liabilities plus net worth, remains balanced. For a healthy business, net worth will be positive, whereas for a bankrupt firm, net worth would be negative, but in both cases, the vital principle that assets must balance with liabilities and net worth remains unchanged.
At the end of an accounting cycle, it's critical to accurately report the company's financial position. Unearned revenue adjustments are an example of the types of adjustments that are made to ensure financial statements accurately reflect the activity within the period. As such, these adjustments help stakeholders understand the true financial health and obligations of the business, leading to more informed decisions.