What would be the effect on December's statement of earnings of a utility bill received on December 27, 2013 but which will not be paid until January 10, 2014?
A) Profit will be decreased when we pay the bill in January
B) No expense will be recognized until the bill is paid in January
C) We would cause an increase in profit by recording the expense in December
D) Recording the expense in December when it is incurred will increase expenses

Question

Quizplus · Accepted Answer

The accrual accounting method requires expenses to be recognized in the period in which they were incurred, regardless of when they are paid. Therefore, recording the utility bill as an expense in December when it was incurred will increase December's expenses and decrease December's profit. The fact that the bill won't be paid until January will not affect its recognition as an expense in December.

What Would Be the Effect on December's Statement of Earnings