Answer the following question:

A company records annual adjusting entries. If the company does not record the entry to adjust the Deferred (or unearned) Revenue account for the services provided to their customer, what effect will this have on the year end financial statements? Note that understated means too low and overstated means too high.

a) Liabilities will be understated and net income will be overstated.

b) Liabilities will be overstated and net income will be overstated.

c) Liabilities will be overstated and net income will be understated.

d) This will have no effect on the year end financial statements.

e) Liabilities will be understated and net income will be understated.