An accrued expense occurs when:
Multiple Choice
? Cash payment (or an obligation to pay cash) occurs before the cost is used in running the business.
? An expense is recorded at the same time as the cash payment.
? An expense is recorded before the payment of cash.
? Cash is paid but an expense is never recorded.
Question 2
On July 1, 2024, Charlie Company paid $18,000 to Rent-An-Office for rent covering 18 months from July 2024 through December 2025. What adjusting entry should Charlie Company record on December 31, 2024?
Multiple Choice
? Debit Prepaid Rent and credit Rent Expense for $6,000
? Debit Rent Expense and credit Cash for $18,000
? Debit Rent Expense and credit Prepaid Rent for $18,000
? Debit Rent Expense and credit Prepaid Rent for $6,000
Question 3
Permanent accounts would not include:
Multiple Choice
? Common Stock.
? Office Supplies.
? Accounts Payable.
? Service Revenue.
The Correct Answer and Explanation is :
Question 1:
Correct Answer:
- An expense is recorded before the payment of cash.
Explanation:
An accrued expense occurs when a business incurs an expense but has not yet paid for it. These expenses are recognized in the financial statements because they reflect obligations that the company must settle in the future. Common examples include wages payable, interest payable, and utility expenses. Accrual accounting follows the matching principle, which ensures expenses are recorded in the same period as the revenues they help generate, regardless of when cash is paid.
Question 2:
Correct Answer:
- Debit Rent Expense and credit Prepaid Rent for $6,000.
Explanation:
Charlie Company initially recorded the $18,000 payment as Prepaid Rent, an asset, since it covers future periods. On December 31, 2024, six months of the 18-month rent payment have expired (July through December). The expense for those six months is calculated as follows:
[ 18,000 \div 18 \text{ months} \times 6 \text{ months} = 6,000 ]
The adjusting entry recognizes this expense:
- Debit Rent Expense for $6,000 to record the cost of rent used.
- Credit Prepaid Rent for $6,000 to reduce the prepaid asset account.
Question 3:
Correct Answer:
- Service Revenue.
Explanation:
Permanent accounts are accounts that carry balances into future periods. These include asset, liability, and equity accounts such as Common Stock, Accounts Payable, and Office Supplies. In contrast, Service Revenue is a temporary account that tracks income during a specific period. Temporary accounts, including revenues, expenses, and dividends, are closed at the end of the accounting period to retain earnings. After closing entries, temporary accounts reset to zero for the next period, whereas permanent accounts continue accumulating.