Question

When a company incurs accrued expenses, which of the following is true?

1) An asset account decreases.
2) Stockholders' equity increases.
3) Assets are not affected.
4) All of the answers are correct.

Answer 1

In accrual accounting, when accrued expenses are recognized, an asset account does not decrease, stockholders' equity does not increase, and assets are not affected. The correct option is 3) Assets are not affected.

Step-by-step explanation:

When a company incurs accrued expenses, it means that an expense has been recognized on the books before it is paid. The accounting entry for an accrued expense involves an expense being debited (increasing the total expenses) and a liability being credited (increasing the total liabilities). This reflects that the company owes money for expenses that were incurred, typically for services or goods received, but not yet paid for. As a result of this accounting entry:

1. An asset account does not decrease.

2. Stockholders' equity does not increase; it is unaffected because the expense will reduce net income, which in turn reduces retained earnings, a component of stockholders' equity.

3. Assets are not affected because the increase in liabilities is not balanced by a change in assets, but rather by the recognition of an expense.

Therefore, based on the principles of accrual accounting, the correct answer is option 3: Assets are not affected when a company incurs accrued expenses.