What is the effect of failing to make an adjusting entry for accrued revenue?

Failing to make an adjusting entry for accrued revenue will lead to an understatement of revenues. Accrued revenue refers to income that has been earned but not yet received in cash or recorded in the financial statements. When this adjusting entry is neglected, the revenue for the period does not reflect all the earnings that were actually realized, reducing the total revenues reported.

Since revenues directly impact net income and are part of the overall financial position, an understatement can mislead analysts, investors, and management regarding the business’s performance. Accurate revenue reporting is crucial for understanding a company's financial health and for making informed decisions. Thus, recognizing all earned revenues is essential for the financial statements to present a true and fair view of the company's activities during a given period.