At the end of the year the accountant for Metro Inc failed t

At the end of the year, the accountant for Metro Inc. failed to record fees earned by the company during the year, the effect of this error would be:

a) an overstatement of assets and an undertstatement of net income.

b) an understatement of assets and an overstatement of net income.

c) an overstatement of assets and net income.

d) an understatement of assets and net income

e) None of the above

Solution

a) overstatement of assets and understatement of net income

Explanation:

if the fees earned in not recorded in income statement then the profit earned will also be less i.e understated.

Normally profit earned in the income statement is transferred to balance sheet liability side and is added to capital(or reserves and surplus in some cases). And here if the same understated profit is transferred to liabilty side in balance sheet then liabilities will be understated. It means the asset side i.e, assets are overstated.