Question

Which of the following is an example of an accrual? A : Record Revenues that were received in cash in an earlier period. B : Record Revenues that will be received in cash in a subsequent period. C : Record Wage Expense that is incurred and paid in the same period. D : Record Rent Expense that was prepaid.

Answer 1

Answer: B. Record revenue that will be received in cash in a subsequent period.

Explanation: Accrual Accounting is a method that records transactions when they have inccured. Instead of when the cash is exchanged.

A. Incorrect. Impossible to record in earlier periods. As the past financial statements from previous years have already been closed off.

B. Correct. Accrued accounting entails recording the transaction when it has occurred. So the cash will be recorded as received. However the cash will only be transferred to the revenue account when the obligation has been met. Therefore it will only be transferred to revenue in the period that it applies to.

C. Incorrect. This is already general expense and general accounting rules apply. I.e. The expense is incurred in the same year and paid out in the same year. This is how most income and expenses are treated, except for prepaid and accrual income and expenses.

D. Incorrect. This is an example of a prepaid expense. Prepaid expenses are expenses that have already been paid even though they haven't been inccured yet. This is an asset, and is thus recorded on the debit side.