What is the effect of "Accruing" an expense at year-end?

Question

BlackTom AI · Accepted Answer

Under accrual accounting, accruing an expense means recording an expense that has been incurred but not yet paid. The standard adjusting entry is: debit the expense account and credit an accrued liability (e.g., Accrued Expenses Payable). This entry increases liabilities and reduces equity.

Relevant knowledge points and concepts:
- Accrual basis and the matching principle require expenses be recorded when incurred, not when cash is paid.
- The basic accounting equation: Assets = Liabilities + Equity.
- Expenses reduce net income. When closed, reduced net income lowers retained earnings and therefore equity.
- Accrued liabilities represent obligations to pay in the future.

Step-by-step reasoning with an illustrative journal entry:
1. Company incurs a $1,000 expense at year-end but will pay later.
2. Journal entry: Debit Expense $1,000; Credit Accrued Expenses Payable $1,000.
3. Effect on accounts:
   - Expense increases by $1,000. Higher expenses reduce net income, which reduces retained earnings (a component of equity) by $1,000.
   - Accrued Expenses Payable (a liability) increases by $1,000.
   - Cash and other assets are unchanged at the moment of accrual.

Numerical example to show the accounting equation:
- Before accrual: Assets = $100,000; Liabilities = $40,000; Equity = $60,000 (100,000 = 40,000 + 60,000).
- Accrue $1,000 expense: Assets = $100,000 (unchanged); Liabilities = $41,000 (+1,000); Equity = $59,000 (−1,000).
- New equation: 100,000 = 41,000 + 59,000 (still balanced).

Why the correct answer is correct:
The accrual creates a payable (increases liabilities) and records an expense that reduces net income and retained earnings (decreases equity).

Why the other options are incorrect:
- Decrease Assets, Decrease Equity: describes paying an expense in cash, not accruing it.
- Decrease Liabilities, Increase Equity: would reflect settling a liability or recording revenue, the opposite effect.
- Increase Assets, Increase Liabilities: describes acquiring an asset on credit, not recording an expense.

Conclusion: Accruing an expense at year-end increases liabilities and decreases equity, matching the provided answer: "Increase Liabilities, Decrease Equity."

What is the effect of "Accruing" an expense at year-end? 单项选择题

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