Question

A law firm received $2240 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause:

-net income to be overstated.
-liabilities to be understated.
-revenues to be understated.
-expenses to be overstated

Answer 1

The failure to make an adjusting entry would lead to understated revenues and retained earnings, not an overstatement of expenses, depicting an inaccurate financial position. An adjusting entry should debit Unearned Service Revenue and credit Service Revenues after services are provided.

Step-by-step explanation:

If a law firm received $2240 cash for legal services to be rendered in the future and the full amount was credited to the liability account Unearned Service Revenue, not making an adjusting entry after the services have been rendered would cause the financial statements to be inaccurate. By not adjusting the unearned service revenue account to reflect that services have been provided, revenue is understated. Consequently, the firm's expenses will not be overstated since the error lies on the revenue side of the equation, not expenses.

In accounting, it is critical to match the earned revenue with the expenses incurred in earning that revenue within the same accounting period. When the firm earns the revenue, an adjusting entry should be made to debit the Unearned Service Revenue account and credit the Service Revenues account. Failure to make this adjustment would result in understated revenues and retained earnings, leading to inaccurate representation of the firm's financial position at the end of the accounting period.