If an entity fails to adjust for accrued revenues: Group of answer choices liabilities will be understated and revenues will be understated. liabilities will be overstated and revenues will be understated. assets will be overstated and revenues will be understated. assets will be understated and revenues will be understated.
Question
If an entity fails to adjust for accrued revenues: Group of answer choices
liabilities will be understated and revenues will be understated.
liabilities will be overstated and revenues will be understated.
assets will be overstated and revenues will be understated.
assets will be understated and revenues will be understated.
Solution
If an entity fails to adjust for accrued revenues:
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Liabilities will not be overstated. Accrued revenues are not liabilities; they are revenues that have been earned but not yet received. Therefore, not adjusting for them would not cause liabilities to be overstated or understated.
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Revenues will be understated. Accrued revenues are revenues that have been earned but not yet received. If they are not adjusted for, they will not be recorded, and therefore revenues will be understated.
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Assets will not be overstated. Accrued revenues are assets (receivables), so if they are not adjusted for, assets will be understated, not overstated.
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Therefore, the correct answer is: assets will be understated and revenues will be understated. If an entity fails to adjust for accrued revenues, it means that the entity has earned revenue (which increases assets) but has not recorded it. This results in both assets and revenues being understated.
Similar Questions
Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause: Question 2 Answer a. An understatement of revenues and an understatement of liabilities b. Profit to be overstated c. An understatement of assets and an understatement of revenues d. An understatement of revenues and an overstatement of liabilities
Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause: Group of answer choices profit to be understated. an overstatement of assets and an overstatement of liabilities. an understatement of expenses and an understatement of liabilities. an overstatement of expenses and an overstatement of liabilities.
The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues. True False
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