What is the effect on the financial statements when a company fails to adjust the unearned revenue account for revenues earned at year-end?
A)Net income is understated and assets are understated.
B)Revenues are understated and liabilities are understated.
C)Net income is understated and liabilities are overstated.
D)Revenues are understated and stockholders' equity is overstateD.Failure to recognize revenues that were previously reported as unearned results in lower revenues = lower net income figure; overstated unearned revenue = overstated liabilities.

Question

Quizplus · Accepted Answer

Failure to adjust the unearned revenue account for revenues earned at year-end results in an understated net income and an overstated liability. The unearned revenue account represents a liability for the company until the revenue is earned. If revenue is earned at year-end but not recognized, the liability is overstated, resulting in an overstatement of liabilities and an understatement of net income.

What Is the Effect on the Financial Statements When a Company