Discuss the effect on the Financial Statements (Income Statement, Balance Sheet, Stockholders' Equity) when revenues that...

Discuss the effect on the Financial Statements (Income Statement, Balance Sheet, Stockholders' Equity) when revenues that should be deferred are prematurely recognized in the Financial Statements.

Expert Solution

Effects of Deferred Revenue prematurely recognized in the Financial Statement.

Effect on Income Statement: First of all Income of the period is Overstated and tax liability of the business increases. Not only income is overstated the Income statement does not reflect the correct working of the business.

Effect on Balance Sheet: Deferred Revenue is actually Liabilities of the Company which should be recorded as a current liability. Recording of deferred revenue as income increases the Retained earning balance of the company. Liability side of the Balance sheet is also understated as unearned revenue is recorded on liability side.

Effect on Shareholder’s Equity: The balance in the shareholder’s equity is Overstated by the amount of Deferred revenue recorded as revenue. Overstated Deferred revenue is erroneously added to Retained earnings of the company which ultimately increase Shareholder’s equity.

ekkarill92 answered 2 years ago

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