Question

You are reviewing O'Brian Co.'s adjusted trial balance for the year ended 12/31/2021. You notice several omissions and incorrect items during your review, some of which are noted below. For each one, you are to determine what effect, if any, these items would have on the stated components of O'Brian Co.'s 2021 Income Statement and 12/31/2021 Balance Sheet if they are not corrected or updated. Assume no income taxes.

What is the effect on Assets, Liabilities, owners equity if rent revenue is recorded for this year, but was actually for next year?

Answer 1

Answer:

The effect on Assets, Liabilities, owners equity if rent revenue is recorded for this year, but was actually for next year.

Effect due to Error

Journal Entry for Rent (Assuming cash received against advanced rent)

Dr. Cash                 $XXX

Cr. Rent Revenue  $XXX

Revenue has been recorded instead the short term liability. Due to this transaction Equity increased and Liability is decrease. Cash entry is accurate it has no effect due to mistake.

Effect due to Rectification

Rectification entry

Dr. Rent Revenue                 $XXX

Cr. Unearned Rent income  $XXX

This will reduce the revenue which will ultimately reduce the equity value in balance sheet and Increase the liability value, cash has already been recorded correctly.