At the end of the accounting period, before the adjusting entries for accrued revenues are recorded, which of the following statements is true?

• A. Revenues are overstated and assets are understated.
• B. Revenues are understated and assets are understated.
• C. Revenues are overstated and assets are overstated.
• D. Revenues are understated and liabilities are overstated.

Answer: (B)

Verified step by step guidance

1. Understand the concept of accrued revenues: Accrued revenues are revenues that have been earned but not yet recorded in the books of accounts because the cash has not yet been received. These are typically recorded as an adjusting entry at the end of the accounting period.
2. Recognize the impact of not recording accrued revenues: If accrued revenues are not recorded, it means that the revenue earned during the period is not reflected in the income statement, and the corresponding asset (such as accounts receivable) is not reflected in the balance sheet.
3. Analyze the relationship between revenues and assets: When accrued revenues are not recorded, both revenues and assets are understated because the earned revenue is missing from the income statement, and the receivable (an asset) is missing from the balance sheet.
4. Eliminate incorrect options: Review the provided options and eliminate those that do not align with the understanding that both revenues and assets are understated when accrued revenues are not recorded.
5. Select the correct answer: The correct statement is 'Revenues are understated and assets are understated,' as this accurately reflects the impact of not recording accrued revenues at the end of the accounting period.