Question

Errors on IS from not making UE rev entry- a. Overstated revenue, understated expenses

b. Understated revenue, overstated expenses
c. Overstated revenue, overstated expenses
d. Understated revenue, understated expenses

Answer 1

The correct answer to the impact of not making an unearned revenue adjustment on an income statement is that it results in overstated revenue and understated expenses.

Step-by-step explanation:

The question relates to the impact of not making an unearned revenue (UE) adjustment entry on an income statement (IS). If the entry is not made, this leads to an overstatement of revenue and an understatement of expenses. Unearned revenue represents money received before the services have been performed or goods have been delivered. This amount should not be recognized as revenue until the service is performed or goods delivered. Without adjusting for unearned revenue, the revenue will be incorrectly reported as higher because it includes amounts that should not be recognized yet. Correspondingly, expenses will be understated because the costs associated with generating the unearned revenue have not yet been incurred and thus not recognised. Therefore, the correct answer to the question posed is: