Question

Errors on BS from not making UE rev entry: a. Overstated assets, understated equity

b. Understated assets, overstated equity
c. Overstated assets, overstated equity
d. Understated assets, understated equity

Answer 1

When a company fails to make an adjusting entry, it can result in an inaccurate financial position. Unearned revenue can lead to understated assets and overstated equity.

Step-by-step explanation:

When a company fails to make an adjusting entry for unearned revenue, it can result in an inaccurate representation of its financial position. The correct answer to this question is option b. Understated assets, overstated equity.

Unearned revenue refers to money received by a company in advance for goods or services that have not yet been provided. This is recorded as a liability on the balance sheet until the revenue is earned. If the company fails to make the necessary adjusting entry, it will understate its assets and overstate its equity.

For example, let's say a company receives $10,000 in advance for a service it will provide over the next year. Without making the adjusting entry, the company's assets will not reflect the $10,000 it holds in unearned revenue. Consequently, its equity will be overstated because the revenue has not yet been earned.