The accountant for Healthy Life Company, a medical services consulting firm, mistakenly omitted adjusting entries for (a) unearned revenue earned during the year ($34,900) and (b) accrued wages ($12,770). Indicate the effect of each error, considered individually, on the income statement for the current year ended July 31. Also indicate the effect of each error on the July 31 balance sheet.

(a) This will result in an understatement of revenue and net income by $34,900 in the income statement.

In the balance sheet, the liability account (unearned revenue) will be overstated by $34,900, the owners equity will be understated by the same amount.

(b) The income statement effect would be an understatement of expenses by $12,770 and an overstatement of net income by the same amount.

In the balance sheet, the omission will result in an understatement of the accrued wages account (liability) by $12,770, furthermore, the owners equity will be overstated by $12,770.

Explanation:

To recognize unearned revenue, the entries are debit cash and credit unearned revenue. As revenue is earned, debit unearned revenue (a liability account) and credit revenue with the amount earned.

To accrue for wages incurred but yet to be paid, the required entries are debit wages expense and credit accrued wages (a liability account).

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