Question

On August 1, Brooks Company received $13,800 for six months of rent in advance. Brooks credited Deferred Rent Revenue. If the appropriate adjusting entry is not made at the end of the year, what will be the effect on:

(a) Income statement account
(b) Net Income
(c) Balance Sheet account

Answer 1

Step-by-step explanation:

In this question, we assume that the financial year is the calendar year

The financial year is remaining for 5 months whereas the calendar year is remaining for 6 months

So for 5 months, the rent would be treated as income

And for 1 month, it would be treated as a liability

If the appropriate adjusting entry is not made.

So, the effect would be

(a) Income statement account = Revenue is overstated, expense = no effect

(b) Net Income = Since revenue is overstated, so net income is also overstated

(c) Balance Sheet account = Assets = no effect, liabilities = understated and retained earnings = overstated