Question

An architecture firm earned $1960 for architecture services provided with the fee to be paid in the future. No entry was made at the time the service was provided. If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause:

Answer 1

By not recording the $1,960 in the books of account, revenue for the period would be understated by $1,960

Step-by-step explanation:

The accrual concept of accounting requires that revenue should be recognized when it has been earned and expense recorded when it has been incurred.

Earning revenue implies that the goods have been delivered or that the necessary services have been rendered.This means that recording revenue has not nothing to do with cash receipt as receiving cash only relate to cash flow position.

The omission of the $1,960 from the books on the basis that cash has not been received means that revenue is understated as well as the profit for the period under consideration.

Answer 2

Answer: Revenue to be understated

If the fee has not been paid by the end of the accounting period and no adjusting entry is made, this would cause revenue to be understated.

Explanation:

Businesses may be tempted to understate their COGS in order to make their business model look more attractive and their profit more sustainable, making them better candidates for loans. A lower COGS makes the financial statements more attractive – at least until it comes time to pay taxes on the earnings

Fraud in financial statements takes the form of overstated assets or revenue or understated liabilities and expenses. Overstating assets and revenues falsely reflect a financially stronger company by the inclusion of fictitious asset costs or artificial revenues.