A credit customer paid $850 toward his accounts receivable. The accountant recorded a credit to the revenue account. This error would cause __________.
A. revenue to be understated
B. cash to be overstated
C. accounts receivable to be overstated
D. liabilities to be understated
A???
Yes, the correct answer is A. revenue to be understated.
To understand why this error would cause revenue to be understated, let's break down the scenario and the impact of the accountant's recording of the transaction.
1. The credit customer paid $850 toward his accounts receivable: This means that the customer made a payment towards the amount they owed, reducing their accounts receivable.
2. The accountant recorded a credit to the revenue account: The accountant made an error by recording the payment as revenue instead of properly reducing the accounts receivable.
The revenue should not be affected by the payment of a credit customer because it represents the income earned from the sale of goods or services. However, in this case, the accountant mistakenly recorded the payment as revenue, which will result in revenue being overstated.
Therefore, the correct answer is A. revenue to be understated, as the error of recording the payment as revenue will cause the revenue to not be recognized correctly.