A law firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Legal Fees. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause

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If no adjusting entry is made to recognize the revenue earned from the legal services, then revenues will be understated. This is because the $2,000 cash received was initially recorded as a liability (Unearned Legal Fees) until the services were rendered. Once the services are rendered, the liability should be reduced and the revenue should be recognized. If this is not done, then the revenue will not be reflected in the financial statements, leading to an understatement of revenue and potentially an understatement of net income.

A Law Firm Received $2,000 Cash for Legal Services to Be