If A Company Fails To Adjust An Unearned Revenue

 

What happens if a company or business forgets to adjust Unearned Revenue or Revenue Received In Advance?

 

The answer to this question is that when the company records unearned revenue based on Accrual Basis of Accounting, then it debit cash account and credit unearned revenue. At the time of adjustments, the adjusting entry is not recorded and hence the value of unearned revenue is not adjusted.

 

The adjusting entry is shown below:

 

                                                      Cash a/c  XXX

 

                                                                   Unearned Revenue a/c  XXX

 

                                                   (Revenue Received In Advance)

 

Due to this mistake, the amount of Liabilities is overstated in Balance Sheet as that portion of unearned revenue which is actually earned by the company is not deducted from total value of unearned revenue.

Also, the relevant revenue account which is now earned not recorded in Income Statement, so Net Income or Net Profit is understated.