Which of the following transactions and events results in an increase in liabilities and a decrease in net income?

Question

BlackTom AI · Accepted Answer

Consider the effect of each transaction on a company’s financial statements and especially on liabilities and net income.
Option 1: Collecting cash from a customer for services to be provided in the future. This increases an asset (cash) and typically increases a liability (unearned revenue) if the service has not yet been performed. It does not decrease net income at the point of collection, since revenue is not yet earned. Therefore, it does not fit the requirement of increasing liabilities and decreasing net income.
Option 2: The accrual of revenue earned at year-end. When revenue is earned, you record revenue and typically an increase in net income. This also may create a receivable if not collected, but it increases net income rather than decreases it, and it does not inherently increase liabilities. Thus, this option does not match the given effect.
Option 3: Adjustment of the unearned revenue account for revenue earned during the period. Recognizing revenue from previously unearned revenue decreases a liability (unearned revenue) and increases revenue, which increases net income. This decreases liabilities but increases net income, opposite of the asked combination.
Option 4: The accrual of salaries expense at year-end. Accruing salaries expense records a liability (accrued salaries payable) and recognizes an expense, which reduces net income for the period. This combination increases liabilities and decreases net income, matching the required effect.
Overall, only Option 4 produces both an increase in liabilities and a decrease in net income. The other options either affect assets or revenues in ways that do not align with the specified outcomes.

Which of the following transactions and events results in an increase in liabilities and a decrease in net income? Single choice

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