Question

Effect of Omitting Adjusting Entry At the end of January, the first month of the business year, the usual adjusting entry transferring rent earned from the unearned rent account to a revenue account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for January and (b) the balance sheet as of January 31. Also indicate whether the items in error will be overstated or understated. a. Income Statement Revenues Expenses Net Income b. Balance Sheet Assets Liabilities Owner's Equity

Answer 1

Reasons : Since Revenue is not credited, Revenue will be Decreased i.e., Understated (a). Income Statement Revenues Understated Expenses NO Effect Net income Understated Revenues Understating Results in Lower Net Income (b). Balance Sheet Assets Liabilities Owner's Equity NO Effect Overstated Understated Since rent earned not transferred, it is overstated Lower Net Income Results in lower retained earnings will effect i.e., Understatement of Owners Equity