Question

Your company used $400 of electricity during your first month in business. The Electric Company sent you a bill at the end of the first month, but payment was not due until the 10th of month 2, so you did not pay the bill until month 2. Which of the following is true?

A You record the $400 expense when you pay it in month 2 and do nothing in month 1.
B You record the $400 expers and reduce assets in month 1, even though it will not be paid until month 2
C You record the $400 expense and increase liabilities in month 1.
d. You increase both assets and liabilities by $400 in month 1. These will both be reduced in month 2 when you make the payment

Answer 1

(C). You record the $400 expense and increase liabilities in month 1

Step-by-step explanation:

The rule of conservatism or Prudence states in clear words,

"Do not anticipate a profit, but provide for all possible losses."

Hence an expense of $400 would be recorded and recognized in advance as per the accrual concept of accounting.

The journal entry for this would be:

Expenses Payable A/C Dr. $400

To Expenses A/C $400

(Being an expense that relates to next month recognized now)

When the actual payment is made, the entry would be;

Expenses A/C Dr. $400

To Cash/Bank A/C $400

(Being expenses paid recorded)

Thus, correct option is (c) You record the $400 expense and increase liability in month 1.