Final answer:
Not adjusting the unearned rent revenue account leads to overstated revenue and liabilities being understated because the revenue that should have been recognized remains as a liability. Expenses are not affected, and the correct effect is overstated revenue. Option B is the correct answer.
Step-by-step explanation:
Effects of an Adjustment Failure on Financial Statements
When a company receives payment for services that have not yet been provided, it records the amount as an unearned revenue, which is a liability on the balance sheet. As the service is provided over time, the company should recognize this payment as revenue, shifting it from the liability category of unearned revenue to the revenue category on the income statement. Not adjusting the unearned rent revenue account accurately would cause the revenue to be overstated. This is because the amount that should have been recognized as earned and included in the income statement remains as a liability, making the total revenue for the month appear higher than it should be.
When adjusting journal entries are not made, the liabilities section will not show a decrease in unearned revenue that should occur as the service is provided. This will result in an understatement of liabilities. It's important to recognize that expenses are not directly affected in this case as this transaction does not relate to costs incurred by the company but rather to the timing of revenue recognition.
Therefore, the correct answer to the effect of failing to adjust an unearned rent revenue account for revenue that should be recognized is that it will cause (b) Overstated revenue.