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

Question

Quizplus · Accepted Answer

The receipt of $12,600 cash from a customer as a payment on their account should have been credited to Accounts Receivable and not Rent Revenue. This means that the company's assets are overstated by $12,600 (due to the incorrect credit to Rent Revenue), but their owners' equity is also overstated by $12,600 (due to the absence of the correct credit to Accounts Receivable). Therefore, the correct answer is B.

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