Question

A receipt of $12,600 cash from a customer as a payment on their account was incorrectly credited to Rent Revenue. What is the effect of this error on the financial statements of the company?

Multiple Choice

• Assets are understated by $12,600 and owners' equity is understated by $12,600.

• Assets are overstated by $12,600 and owners' equity is overstated by $12,600.

• Assets are understated by $12,600 and liabilities are understated by $12,600.

• Assets are overstated by $25,200 and owners' equity is overstated by $25,200.

• Assets are understated by $25,200 and owners' equity is understated by $25,200.

Answer 1

Answer is option second - Assets are overstated by $ 12,600 and owners' equity is overstated by $ 12,600.

Cash is received from a customer, it was credited to rent revenue instead of Accounts Receivable.

It was credited to rent revenue, this would result in increase in owners' equity by $ 12,600

It was not credited to Accounts receivable, this would result in increase in assets by $ 12,600 otherwise assets would have veen lower by $ 12,600.

Hence, option second is correct.