Question 10: At what point are other current assets usually recorded? D Answer A. B. C. When the item is ordered At the time you purchase them When the item is invoiced At the time the customer purchases them
The Correct Answer and Explanation is :
The correct answer is B. At the time you purchase them.
Explanation:
Current assets are typically recorded on the balance sheet when they are acquired, which is usually at the time of purchase. The definition of a current asset is any asset that is expected to be converted into cash or consumed within one year or within the company’s operating cycle, whichever is longer. Common examples of current assets include cash, accounts receivable, inventory, and short-term investments.
The process of recording assets, including current assets, follows the accrual accounting method. Under accrual accounting, transactions are recorded when they occur, not when cash changes hands. This means that once the asset is purchased, it is recognized in the company’s accounting system, regardless of whether the company has already paid for the asset or not.
For example, if a business purchases inventory on credit, it would record the inventory as an asset immediately upon the purchase. The inventory is then classified as a current asset, because it is expected to be sold or used within the next year, generating revenue or being consumed.
The other options in the question are incorrect because:
- A. When the item is ordered: Ordering an item is not the point when it becomes an asset. The transaction is not complete, and there is no economic benefit received yet.
- C. When the item is invoiced: Although invoicing is a critical part of the transaction, it may occur after the asset is already purchased or received. The invoice does not trigger the recognition of the asset but helps track the payable.
- D. At the time the customer purchases them: This option pertains to the recognition of revenue, not the recording of assets. The business would recognize revenue from the sale when it is earned, which is typically after the item is delivered or when the service is performed.
Therefore, B is the correct answer because current assets are recorded at the time they are purchased, ensuring the business reflects the acquisition and its impact on the company’s financial position.