A receipt of $15,700 cash from a customer as a payment on account was incorrectly credit to service revenue. Which is the effect of this error on the company's financial statements?
A) Assets are overstated by $31,400 and owners' equity is overstated by $31,400.
B) Assets are understated by $15,700 and owners' equity is understated by $15,700.
C) Assets are understated by $15,700 and liabilities are understated by $15,700.
D) Assets are overstated by $15,700 and owners' equity is overstated by $15,700.
E) Assets are understated by $31,400 and liabilities are understated by $31,400.

Question

Quizplus · Accepted Answer

The incorrect credit to service revenue would result in an overstatement of revenue and an understatement of accounts receivable, a current asset account. Since the cash was received, assets are not understated. The incorrect credit to service revenue would result in an overstatement of owner's equity. Therefore, assets are overstated by $15,700 and owners' equity is overstated by $15,700.

A Receipt of $15,700 Cash from a Customer as a Payment