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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

Which of the following best explains why a business records an accrual for electricity used in December when the bill will only be received in January?

An accrual is recorded because expenses are recognised when incurred, not when paid. December electricity belongs to December's profit, so an expense and a liability are recognised at the year end even though the bill arrives in January.

  1. AExpenses must be recognised when they are incurred, not when cash is paid, so that profit is matched to the periodCorrect
  2. BPrudence requires that all expenses are recorded as soon as the bill is expected
  3. CCash basis is used for utilities so the expense is recorded in the period of payment
  4. DThe statement of financial position must show no payables at the year end

Explanation

The accruals (matching) basis requires expenses to be recognised in the period in which the related resources are consumed, regardless of payment. Electricity used in December is a December expense, with a liability for the unpaid amount. The cash basis option is wrong because financial statements are prepared on the accruals basis.

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