How do adjusting entries for accrued expenses affect liabilities and expenses on the financial statements?

• A. They increase both liabilities and expenses.
• B. They decrease liabilities and increase expenses.
• C. They decrease both liabilities and expenses.
• D. They increase liabilities and decrease expenses.

Answer: (A)

Verified step by step guidance

1. Understand the concept of accrued expenses: Accrued expenses are expenses that have been incurred but not yet paid or recorded in the financial statements. These are typically recognized at the end of an accounting period to ensure accurate financial reporting.
2. Identify the impact on liabilities: When adjusting entries for accrued expenses are made, a liability account (such as 'Accrued Expenses' or 'Accounts Payable') is increased to reflect the obligation to pay the expense in the future.
3. Identify the impact on expenses: The corresponding expense account (such as 'Utilities Expense' or 'Salaries Expense') is increased to recognize the expense incurred during the period, even though it has not yet been paid.
4. Understand the overall effect: Adjusting entries for accrued expenses ensure that both liabilities and expenses are accurately reported on the financial statements. This adjustment increases both liabilities (to show the obligation) and expenses (to reflect the incurred cost).
5. Review the financial statement impact: On the balance sheet, liabilities increase due to the accrued expense. On the income statement, expenses increase, which reduces net income for the period.