Question

A law firm received $2,000 cash for legal services to be provided in the future. The full amount was credited to the liability account Revenue Received in Advance. If the legal services have been provided at the end of the accounting period and no adjusting entry is made, this would cause:

Select one:

a. liabilities to be understated.

b. profit to be overstated.

c. revenues to be understated.

d. expenses to be overstated.

Answer 1

As the amount was received in advance, it created a liability for the firm. Now, the firm
has provided the services for which it was paid in advance, it means such unearned revenue
has been earned now. Therefore, we need to recognize the same in the books by passing
an adjusting entry. In case such entry is not passed, it'll result in understatement of revenue
and overstatement of liability.
Therefore, the answer is:			c) revenues to be understated