A company records the fees for legal services paid in advance by its clients in an account called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to record the portion of these fees that has been earned, one effect will be:
A) An overstatement of equity.
B) An understatement of equity.
C) An understatement of assets.
D) An understatement of liabilities.
E) An overstatement of assets.

Question

Quizplus · Accepted Answer

If the company does not adjust for the earned portion of unearned fees, revenue will be understated, leading to an understatement of equity since revenue increases equity.

A Company Records the Fees for Legal Services Paid in Advance