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If a company omits the month-end adjusting entry for accrued revenue earned on an unfinished job, what is the effect on the financial statements?
AAssets overstated and net profit overstated
BAssets understated and net profit understated
CLiabilities understated and net profit overstated
DAssets understated and net profit overstated
Answer & Solution
Correct answer: B. Assets understated and net profit understated
1. Without the entry, Accounts Receivable (an asset) is too low, so assets are understated.
2. Fees Earned is too low, so revenue and net profit are understated.
3. The understated profit closes to equity, understating equity.
4. Therefore B is correct; the other options reverse at least one effect.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §2.5.2 "Fees Earned—Accrued Revenue", p.87_