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.

Question

Quizplus · Accepted Answer

When a company fails to adjust the unearned revenue account for revenues earned at year-end, it results in an understatement of net income and an overstatement of liabilities. This is because the unearned revenue account is a liability account representing the amount of revenue received in advance but not yet earned. As the company earns the revenue, the unearned revenue account should be reduced and the revenue account should be increased. If this adjustment is not made, the company will be overstating its liability and understating its revenue, leading to an understatement of net income.

What Is the Effect on the Financial Statements When a Company