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 move the portion of these fees that has been earned to a revenue account, one effect will be:
A) An understatement of assets.
B) An understatement of equity.
C) An overstatement of assets.
D) An understatement of liabilities.
E) An overstatement of equity.

Question

Quizplus · Accepted Answer

If the company does not adjust the Unearned Legal Fees to reflect the earned portion as revenue, it will understate revenue and, consequently, understate equity, since revenue contributes to equity through retained earnings.

A Company Records the Fees for Legal Services Paid in Advance