Home › ACCA › Financial Accounting › Deferred Revenue › If the adjusting entry to recognise revenue earn…
If the adjusting entry to recognise revenue earned from a customer prepayment is omitted at month-end, what is the effect on the financial statements?
ALiabilities overstated and net profit overstated
BLiabilities understated and net profit overstated
CAssets overstated and net profit overstated
DLiabilities overstated and net profit understated
Answer & Solution
Correct answer: D. Liabilities overstated and net profit understated
1. Without the entry, Unearned Fees (a liability) stays too high, so liabilities are overstated.
2. Fees Earned is too low, so revenue and net profit are understated.
3. The understated profit closes to equity, understating equity.
4. Therefore D is correct; the other options reverse one or both effects.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §2.4.1 "Unearned Fees—Deferred Revenue", p.79_