Question

On September 30, ABC Co. received a bill for $1,000 for running a newspaper ad in September. The bill

will be paid in October. Which of the following statements is correct for the month of September?*
a. Liabilities are decreased by $1,000.
b. Assets are decreased by $1,000.
c. Expenses are increased by $1,000.
d. Revenues are decreased by $1,000.
e. Assets are increased by $1,000.

Answer 1

For the month of September, the correct financial impact is that expenses are increased by $1,000 due to the receipt of a bill for advertising services rendered in September, which ABC Co. will pay in October.

Step-by-step explanation:

The correct statement for the month of September when ABC Co. received a bill for $1,000 for advertising but will pay it in October is: c. Expenses are increased by $1,000.

When ABC Co. receives a bill for services already received, it records the expense in the period the service was rendered, not when the payment is made. This adheres to the accrual basis of accounting. Even though the cash has not been disbursed yet, the expense is recognized, and a liability (accounts payable) would be created. This liability represents an obligation to pay in the future. Therefore, the company's liabilities increase by $1,000, not decrease. Assets are not immediately affected because payment has not been made yet. Revenues are not decreased by the expense directly, and assets are not increased by this transaction. The correct accounting entry would involve debiting an expense account and crediting a liability account.