Question

If a utilities expense is incurred in February but was paid in January, the effect on the February financial statements is that O A) An expense decreases B) A liability increases C) An asset increases D) An asset decreases

Answer 1

Under the accrual method of accounting the expenses are recognised in the financial only when they are incurred, the payment in advance for an expenses is termed as an assets and recorded in financial statement as a prepaid expenses having a nature of assets account.

And when the actual expenses is incurred the income statement is debited i.e expenses is increased in income statement and the prepaid expenses i.e assets is decreased by reversing the entry by debiting the expenses and credting the prepaid expenses.

In the given case, the Utility expenses is already paid in january but expenses was not incurred so in january the payment must be debited as prepaid and recorded as an assets.

further when actual expenses is incurred in February the Utility expenses is debited and Assets account of prepaid utility expenses is credited.

This means that in february the expenses are increased as booked and Assets are decreased as reversed.

Thus the option A , B and C is incorrect as expenses is not decreases , liability is not increases , and assets is also not incresed , but in actual the assets have been decreased.

Thus the correct option is ------------------D i.e An Assets Decreases.