Question

On December 1, Smart Touch Learning receives $1,000 cash in advance from a client for performing e-learning services over the next two months (December 1 through January 31). If Smart Touch Learning does not record an adjusting entry on December 31 for the revenue earned in December...

a) It understates revenue and overstates unearned revenue
b) It correctly reflects revenue recognition
c) It understates both revenue and unearned revenue
d) It overstates revenue and understates unearned revenue

Answer 1

If Smart Touch Learning does not record an adjusting entry for December by the end of the month, it will understate revenue and overstate unearned revenue. This does not accurately represent the company's financial status as it fails to recognize the services already performed.

Step-by-step explanation:

If Smart Touch Learning receives $1,000 cash in advance from a client for services to be performed over December and January, and it fails to record an adjusting entry on December 31 for the revenue earned in December, the accounting records would understate revenue and overstate unearned revenue. This is because the service has been partially performed, but the revenue has not yet been recognized. Without recording an adjusting entry, the revenue for December would not be included in the financial statements for that month. By not recognizing the revenue earned, the company's financial picture is not accurately portrayed as it does not reflect the earning process complete for that period.