Accrued and Prepaid (Intro)

What is a prepaid expense?

• An expense paid after the service is received

• An expense paid in advance before the service is received

• An unpaid expense

• A revenue that has not yet been earned

Answer explanation

A prepaid expense is an expense that is paid in advance before the service is received, making the correct choice "An expense paid in advance before the service is received." This distinguishes it from other expense types.

Which of the following is an example of a prepaid expense?

• Wages payable

• Interest expense

• Rent paid in advance

• Accounts receivable

Answer explanation

Rent paid in advance is a prepaid expense because it represents a payment made for future use of property, while the other options are either liabilities or expenses incurred.

Prepaid expenses are recorded in which section of the statement of financial position?

• Current liabilities

• Non-current liabilities

• Current assets

• Non-current assets

Answer explanation

Prepaid expenses are payments made in advance for goods or services to be received in the future. They are considered current assets on the statement of financial position, as they will provide future economic benefits.

What is an accrued expense?

• An expense that has been paid in advance

• An expense that has been incurred but not yet paid

• A liability that has been settled

• A revenue that has not yet been earned

Answer explanation

An accrued expense refers to costs that have been incurred but not yet paid. This means the company has received the benefit of the expense, but the payment is still outstanding, making it a liability.

Which of the following is an example of an accrued expense?

• Interest earned but not received

• Rent paid in advance

• Salaries incurred but not yet paid

• Cash received before service is provided

Answer explanation

Salaries incurred but not yet paid represent an accrued expense, as the company has incurred the cost but has not yet disbursed the cash. This contrasts with the other options, which do not reflect expenses that have been recognized.

Under accrual accounting, expenses are recorded when:

• They are paid

• They are incurred, regardless of payment

• The cash is received

• The invoice is sent

Answer explanation

Under accrual accounting, expenses are recorded when they are incurred, regardless of when payment is made. This means that the correct choice is 'They are incurred, regardless of payment'.

How is a prepaid expense treated over time?

• It becomes an expense as the benet is received

• It is always treated as an asset

• It remains a liability until paid

• It is written off immediately

Answer explanation

A prepaid expense is initially recorded as an asset. Over time, as the benefit is received, it is gradually recognized as an expense, reflecting the consumption of the asset.

Accrued expenses are typically listed in which section of the statement of financial position?

• Current assets

• Current liabilities

• Non-current assets

• Non-current liabilities

Answer explanation

Accrued expenses represent obligations that a company needs to settle in the short term, making them a part of current liabilities on the statement of financial position.

A company received $1000 of utilities but the bill will not be paid until January. What would be the adjusting entry?

• Debit Cash, Credit Utilities Expense

• Debit Utilities Expense, Credit Accounts Payable

• Debit Prepaid Utilities, Credit Cash

• Debit Utilities Expense, Credit Prepaid Utilities

Answer explanation

The company incurred a utilities expense of $1000, which needs to be recognized now. The adjusting entry is to debit Utilities Expense and credit Accounts Payable, reflecting the obligation to pay in January.

When a company incurs interest that has not been paid, it records:

• Interest Receivable (debit), Interest Payable (credit)

• Interest Payable (debit), Interest Expense (credit)

• Interest Expense (debit), Interest Payable (credit)

• Cash (credit), Interest Expense (debit)

Answer explanation

When interest is incurred but not paid, it is recorded as an expense. Thus, Interest Expense is debited to reflect the cost, and Interest Payable is credited to show the liability, making the correct entry: Interest Expense (debit), Interest Payable (credit).