Question

A law firm received $2,000 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:

Answer

expenses to be overstated.

net income to be overstated.

liabilities to be understated.

revenues to be understated.

Answer 1

revenues to be understated

Step-by-step explanation:

The journal entry to record the unearned service revenue is shown below:

Cash A/c Dr $2,000

To Unearned service revenue A/c $2,000

(Being cash is collected)

If the legal service rendered at the end of the year, the adjusting journal entry would be

Unearned Service Revenue A/c Dr XXXXX

To Service revenue A/c XXXXX

(Being the unearned Service Revenue is recorded)

If no adjusting entry is made, then it leads to understated of revenues and overstated of liabilities