How would the following errors affect the account balances and the basic account

Question

How would the following errors affect the account balances and the basic accounting equation: assets = liabilities + owners' equity?  How do the misstatements affect income?  1.  The purchase of a truck is recorded as an expense instead of an asset.  2.  A cash payment on accounts receivable is received but not recorded.  3. Fictitious sales on account are recorded.  4.  A clerk misreads a handwritten invoice for repairs and records it as $1,500 instead of $1,800.  5.  Payment is received on December 31 for the next three months' rent and is recorded as revenue.

How would the following errors affect the account balances and the basic accounting equation: assets = liabilities + owners' equity? How do the misstatements affect income? 1. The purchase of a truck is recorded as an expense instead of an asset. 2. A cash payment on accounts receivable is received but not recorded. 3. Fictitious sales on account are recorded. 4. A clerk misreads a handwritten invoice for repairs and records it as $1,500 instead of $1,800. 5. Payment is received on December 31 for the next three months' rent and is recorded as revenue.

Explanation / Answer

The rent received was recorded as rent revenue, which means that revenues are overstated, which means that net income is also overstated, which also means that Owners Equity will be overstated as well.

The correct entry should have been a Credit to Unearned Rent Revenue (a liability).

Also because of the incorrect recording of a revenue instead of a liability means that your liabilities will be understated.

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