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 an:
A)Overstatement of equity.
B)Understatement of equity.
C)Understatement of assets.
D)Understatement of liabilities.
E)Overstatement of assets.

Question

Quizplus · Accepted Answer

If the company fails to make the adjusting entry to record the portion of unearned legal fees that have been earned, it would result in an understatement of equity. This is because the unearned fees would still be recorded as a liability on the balance sheet, but the revenue earned would not be recorded on the income statement, leading to a lower net income and thus a lower overall equity.

A Company Records the Fees for Legal Services Paid in Advance