Ex 3-12 Effect of omitting adjusting entry

The adjusting entry for accrued fees was omitted at October 31, the end of the current year. Indicate which items will be in error, because of the omission, on (a) the income statement for the current year and (b) the balance sheet as of October 31. Also indicate whether the items in error will be overstated or understated.

Answer:
a.  Fees earned (or revenues) will be understated. Net income will be understated.

b.  Accounts (fees) receivable (or assets) will be understated. Owner’s equity will be understated.