Final answer:
The purpose of the accrued liabilities account adjustment is to recognize expenses incurred but not paid, which aligns with the accrual accounting principle. Additionally, the value of loans in the secondary market varies based on the borrower's payment history, market interest rates, and the borrower's profitability.
Step-by-step explanation:
The purpose of the accrued liabilities account adjustment is A. To recognize expenses that have been incurred but not yet paid. This accounting practice is part of the accrual basis of accounting, which stipulates that expenses should be recorded in the period they are incurred, regardless of when the actual cash payment takes place. This ensures that financial statements provide a more accurate picture of a company’s financial position at any given time.
The money listed under assets on a bank balance sheet may not actually be in the bank because banks operate on the principle of fractional reserve banking. They are required to keep only a fraction of their depositors’ money in reserve, lending out the remainder. This means that at any given time, a significant portion of what is considered an asset on their balance sheet could be loaned out to borrowers and not immediately available as liquid cash in the bank.
- a. Borrower's Payment History: A loan's value will be less if the borrower has been late on a number of loan payments due to increased risk of default.
- b. Market Interest Rates: If interest rates have risen since the loan was made, its value may decrease as it offers a lower return compared to new loans issued at the higher rates. Conversely, the value of the loan may increase if interest rates in the economy as a whole have fallen since the loan was made.
- c. Borrower's Profitability: A loan's value could be higher if the borrower is a firm that has declared high profits, thereby reducing the risk associated with the loan.