I. Balance sheet
Net income is carried from the income statement to the statement of owners' equity. Items affecting retained earnings include net income or loss and payment of dividends. However, net income is not carried over to the balance sheet; it is carried over to the statement of cash flows under cash flows from operating activities.
The two amounts will be the same. The balance sheet reports the cash balance as of a certain date and the statement of cash flows reports the types and total amounts of transactions that produced that balance over a certain period of time.
I. Revenue accounts
Both revenue and expense accounts affect both the income statement and the statement of owners' equity. The income statement is a summary of revenues and expenses and the statement of owners' equity shows changes in the retained earnings account, which is affected by dividends and net income or loss from the income statement.
A. Assets are overstated by $5,000 and liabilities are overstated by $5,000.
The company should have made an adjusting entry to reduce the unearned revenue account (a liability) by $5,000 and increase revenue (and hence net income and retained earnings) by $5,000. As the company failed to make the adjusting entry, the liabilities are overstated and owners' equity is understated.
The dividends account does affect retained earnings because it is closed to the retained earnings account during the closing process. The sales revenue and rent expense accounts also affect retained earnings because they are closed to the income summary account, which is closed to the retained earnings account. The common stock account does not affect retained earnings. Common stock represents stockholders' claims arising from their investment in the company. Retained earnings represent stockholders' claims arising from profitable operations.