At the end of January, the first month of the business year, the usual adjusting entry transferring rent earned from the unearned rent account to a revenue account was omitted. Indicate which items will be incorrectly stated, because of the error, on (a) the income statement for January and (b) the balance sheet as of January 31. Also indicate whether the items in error will be overstated or understated.
Answers:
a. Rent revenue (or revenues) will be understated. Net income will be understated.
b. Unearned rent (liabilities) will be overstated. Owner’s equity (owner’s capital account) at the end of the period will be understated.