Consider the following independent situations.
1. A company provides a service but has not yet received payment. Therefore, the company does not record any revenue for the service.
2. A company receives cash in advance of providing a service and properly records a liability to the customer. At year-end, the company has not provided any of the service. The company does not adjust the liability at year-end.
3. Half of a company's prepaid insurance expires during the year, but the company does not adjust the prepaid insurance account to reflect the expiration.
4. A company incurs legal expenses associated with defending a lawsuit. No bill has been received at year-end, so the company does not record any expenses associated with the lawsuit.
For each independent scenario, determine whether the company's accounting was correct or incorrect. If it was incorrect, determine whether the error resulted in the company's assets, liabilities, equity, revenues, and expenses being correct, understated, or overstated.