Question

The adjusting entry for accrued fees was omitted at July 31, the end of the current year.

Indicate which items will be in error, because of the omission, on (a) the income statement
for the current year and (b) the balance sheet as of July 31. Also indicate whether
the items in error will be overstated or understated.

Answer:
a. Fees earned (or revenues) will be understated. Net income will be understated.
b. Accounts (fees) receivable (or assets) will be understated. Owner’s equity will
be understated.

Answer 1

a. Fees earned (or revenues) will be understated. Net income will be understated.

b. Accounts (fees) receivable (or assets) will be understated. Owner’s equity will be understated.

Both options are right.

Step-by-step explanation:

For fees earned but yet to be received, the entries required are

Debit Accounts receivable

Credit Revenue account

The accounts receivable is a balance sheet item (an asset) while the Revenue account is a p/l item.

Hence where accrued fees was omitted at July 31, the end of the current year, Fees earned (or revenues) will be understated. Net income will be understated resulting in an understatement of retained earnings and invariably owner's equity.

Also, Accounts (fees) receivable (or assets) will be understated. Owner’s equity will be understated.

Answer 2

a) Fees earned (or revenues) will be understated. Net income will be understated.

b) Accounts (fees) receivable (or assets) will be understated. Owner’s equity will

be understated.

Step-by-step explanation:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition, principle and expense recognition principle.

All adjusting entries affect at least one income statement account (revenue or expense), and one statement of position account (asset or liability).