You work in a company that has begun selling annual subscriptions to its new online magazine. During December, the company sold the first subscriptions, receiving $600,000, which represents one-fifth of its revenues from all sources for the year. The entire amount has been collected in cash. As the end of the the year approaches, you notice that the company recorded the entire $600,000 to revenue and there is no plan to make an adjusting entry.
Draft a memo around two paragraphs in length to your supervisor, which explains the following:
The accounting error that has been made
The effect this error will have on the financial statements dated at the end of December
The problems that might result
The importance of fixing the error and what needs to be done to fix the error
Make sure to include proper grammar, spelling, etc.

The memo will indicate the accounting error that has been made and its effect on the financial statements.

The amount of $600,000 collected from the sale of the annual subscription to the new online magazine is the amount that was collected for the upcoming period of 12 months which will start by December of the current year.

Only $50000 of the amount will be recorded for the year. The related services for the remaining eleven months will then be $550000 and this should be reported as the unearned revenue.

The effect of the error is that there'll be an overstating of the net income or the current period by an amount of $550000 and there'll also be an understatement of the current liabilities by $550000.

In conclusion, the error needs to be fixed by debiting the revenue by $550000 and then crediting the unearned revenue by $550000.

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