Question

If cash received for future services is initially recorded in revenue accounts and the company has not yet performed all of the required services at the end of the accounting period, then failure to make an adjusting entry will cause...

- revenues to be overstated.

- accounts receivable to be overstated.

- revenues to be understated.

- liabilities to be overstated.

Answer 1

Answer is - revenues to be overstated.

When cash is received then accounts receivable account can not be effected. Hence, accounts receivable to be overstated is wrong.

Since, cash is received for future services and recorded in revenue accounts, then revenue can not be understated. Hence, revenues to be understated is also wrong.

Liabilities is not effected at all, Hence, liabilities to be overstated is also wrong.

So, the correct answer is Option 1 - revenues to be overstated. Because cash received for future services recorded in revenue accounts and the services are not performed at the end of the accounting period, it would result in overstatement of revenue, as the unearned revenue adjustment entry has not performed by the company.