What are the effects on the financial condition of the business from the adjustment for revenues earned, but not yet collected, during the accounting period?

Question

BlackTom AI · Accepted Answer

Accrued revenues (revenues earned but cash not yet received) are recorded by increasing an asset (Accounts Receivable) and recognizing revenue, which increases stockholders’ equity through retained earnings.

Relevant concepts:
- Accrual accounting: recognize revenue when earned, not when cash is received.
- Adjusting entry for accrued revenue: Debit Accounts Receivable (asset); Credit Revenue (income).
- Effect on equity: Revenues increase net income; net income increases retained earnings (part of stockholders’ equity).

Step-by-step reasoning with a numeric example:
1. Suppose $1,000 of services were performed but not billed or collected by period-end.
2. The adjusting journal entry is:
   - Debit Accounts Receivable $1,000
   - Credit Service Revenue $1,000
3. Immediate balance sheet and income statement effects:
   - Assets: Accounts Receivable increases by $1,000 → Total assets increase by $1,000.
   - Liabilities: no change.
   - Equity: Service Revenue increases net income by $1,000. Assuming no dividends, net income closes to Retained Earnings, increasing stockholders’ equity by $1,000.
4. Accounting equation impact: Assets (+$1,000) = Liabilities (0) + Equity (+$1,000). Equation remains balanced.

Why the correct answer is correct:
- The debit to an asset account raises total assets.
- The credit to revenue raises net income, which raises retained earnings and thus stockholders’ equity.
- Therefore both assets and equity increase.

Why the other options are incorrect:
- “Assets decrease and equity decrease”: would occur if recognizing an expense with cash paid, not accrued revenue.
- “Assets increase and equity decrease”: inconsistent—an increase in assets paired with a decrease in equity would require an expense or dividend, not revenue recognition.
- “Assets decrease and equity increase”: not applicable here; decreasing an asset while increasing equity does not match accrual of revenue.

Conclusion: Total assets will increase and total stockholders' equity will increase. This matches the provided correct answer.

What are the effects on the financial condition of the business from the adjustment for revenues earned, but not yet collected, during the accounting period?Single choice

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