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 understated by $15,700 and liabilities are understated by $15,700.
B)Assets are overstated by $31,400 and owners' equity is overstated by $31,400.
C)Assets are understated by $31,400 and liabilities are understated by $31,400.
D)Assets are overstated by $15,700 and owners' equity is overstated by $15,700.
E)Assets are understated by $15,700 and owners' equity is understated by $15,700.

Question

Quizplus · Accepted Answer

The incorrect credit to service revenue implies that revenue is overstated by $15,700. Since revenue is a component of owners' equity, owners' equity is also overstated by $15,700. Additionally, since the cash receipt was not correctly recorded against accounts receivable, the assets are also overstated by $15,700. Therefore, the correct option is D - 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