At the end of April, the first month of the company's year, the usual adjusting entry transferring rent earned to a revenue account from the unearned rent account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for April and (b) the balance sheet as of April 30. Also indicate whether the items in error will be overstated or understated.

Question

19-02-2021
Business

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At the end of April, the first month of the company's year, the usual adjusting entry transferring rent earned to a revenue account from the unearned rent account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for April and (b) the balance sheet as of April 30. Also indicate whether the items in error will be overstated or understated.

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Tundexi Tundexi · Answer 1 · 2021-02-22T01:56:34+01:00

Answer:

Overstatement is the situation where the amount of any item has been stated more than its actual figure

Understatement is the situation where the amount of any item has been stated less than its actual figure

a. The rent earned will be understated, as a result of which the income statement will give a lower net income.

b. Because of lower net income, retained earnings in stockholders' equity will be understated, and the liability account of unearned rent will be overstated