A receipt of $12,600 cash from a customer as a payment on their account wasincorrectly credited to Rent Revenue. What is the effect of this error on the financial statements of the company?
A)Assets are overstated by $25,200 and owners' equity is overstated by $25,200.
B)Assets are overstated by $12,600 and owners' equity is overstated by $12,600.
C)Assets are understated by $12,600 and liabilities are understated by $12,600.
D)Assets are understated by $25,200 and owners' equity is understated by $25,200.
E)Assets are understated by $12,600 and owners' equity is understated by $12,600.

Question

Quizplus · Accepted Answer

The error resulted in Rent Revenue being overstated by $12,600, which means that assets are also overstated by the same amount (as Rent Revenue is a revenue account). Since the cash received was credited to Rent Revenue instead of Accounts Receivable, the customer's account remains unpaid, which means that owners' equity is also overstated by the same amount. Therefore, assets and owners' equity are both overstated by $12,600.

A Receipt of $12,600 Cash from a Customer as a Payment