At the end of the year, a company makes a journal entry to accrue the interest expense on a short-term note payable. As a result of this transaction:
A)current liabilities increase and current assets decrease.
B)current liabilities increase and equity increases.
C)current liabilities increase and equity decreases.
D)current liabilities decrease and equity decreases.

Question

Quizplus · Accepted Answer

Accruing interest on a short-term note payable means acknowledging the expense incurred during the period but yet to be paid. This increases the current liabilities because it represents a debt that the company owes and should pay soon. At the same time, equity decreases because expenses reduce retained earnings, a component of equity. Therefore, the correct answer is C. Option A is incorrect because it suggests that the transaction decreases current assets, which is not accurate. Option B is also wrong because accruing interest does not impact equity positively. Finally, option D is incorrect because it implies that the accrual of interest expense reduces short-term liabilities, which is not correct.

At the End of the Year, a Company Makes a Journal