Final answer:
When a company fails to record a sale on account under accrual-basis accounting, the revenue and assets are understated since the sale has been earned but not recorded on the financial statements.
Step-by-step explanation:
Under accrual-basis accounting, if a company fails to record a sale on account, the correct answer is: Revenue is understated and Assets are understated.
Accrual-basis accounting recognizes revenues and expenses when they are earned or incurred, regardless of when cash transactions occur. Failing to record a sale means that the company is not acknowledging revenue that it has earned from the sale on account. Consequently, this also means that the company's assets (specifically accounts receivable) are not accurately recorded because the assets should reflect the right to receive money from the sale.
The Impact of Not Recording a Sale on a Company's Financial Statements:
- The revenue on the income statement is understated because the sale has not been recorded.
- Assets on the balance sheet are understated because the accounts receivable that should have been recorded is absent.
- There is no impact on liabilities as no actual transaction regarding liabilities has been omitted.
- Expenses are not directly affected by the failure to record a sale, so they would not be understated as a result of this error.