From an accrual accounting perspective, label the following ev...

Question

From an accrual accounting perspective, label the following events as an expense or not an expense:

An employee works all week for the company
he company pays the employee for the past two weeks of work
The company occupies a space for a month
The company pays for a year's worth of rent

Accepted Answer

Alright. Let's try this practice problem. From an accrual accounting perspective, label the following events as an expense or not an expense. Okay? So this is kind of interesting. So let's think about when the employee works all week for the company. Okay. So I wanna know these they're they're gonna go 2 and 2 here. Okay? So something I want you to know. What is the triggering event for the expense? When the employee works all week for the company or when the company pays the employee for the past 2 weeks of work. So which one is the expense there? The expense is gonna be when the employee works. Right? That's us receiving the benefit of the employee working for us. So this is gonna be the expense right here, is when the employee works for us. We're literally gonna take the expense, and we might see some kind of journal entry like debiting wage expense, right, to increase the expense. And we would credit, a liability like wages payable. Right? That payable tells us it's a liability, and we would have some amount, right, based on the amount that they earned during that week. So we would create a liability there, and then the company pays the employee for the past 2 weeks of work. Alright? So when we pay the employee for the past 2 weeks of work, well, that's that alone is not an expense. Right? This is just the movement of cash. So that would have some sort of journal entry. Let me do it in blue so so so it's separate. This entry might look something like this where we have, a decrease in the wages payable. So this is a a debit to wages payable. And then a credit to cash. Right? Because we're paying them in cash. So notice the difference there. The expense arises from the employee working for us, not from us paying the employee. Right? So the expense goes up because he worked for us and then we just pay him and that gets rid of the liability of having to owe him money. Okay? So let's consider the same thing with the next two. We have the company occupies a space for a month and then the company pays for a year's worth of rent. So which one do you think triggers the expense here? Well, again, it's gonna be this first one. Right? This first one is the expense because this is us receiving the benefit. Right? We're in the space. We're using the space. Whatever it is, the factory to create our product. So we're getting a benefit. Right? We we earn we have the benefit of using the space and that creates the expense. So let me do it in in blue again over here, where we would debit something like rent expense, right, to increase the rent expense. And we would credit, you know, rent payable or something like that. Okay? So we would have to pay the rent and that's that's separate from us actually using the space. Us using the space creates the expense and it makes us have be liable to pay for it. Right? And then we pay for it. So when we do pay for it, well, we're gonna get rid of our payable or we're gonna create some sort of asset for prepaid rent if we if we paid rent in advance. Either way, the payment itself is not an expense. Okay? The payment itself is just the outflow of cash. Okay. This is just the movement of cash. It doesn't by itself create an expense. And that could be something like we we debit, rent payable. Right? We might have had some rent we had to pay, and then we credit cash because we paid in cash. So notice where the expenses line up. The expenses are are here in this entry and here in this entry. Right? And that those are the entries where there's some sort of event where we're getting a benefit. Right? An employee working for the company, we get a benefit there. The company occupying a space, we're getting the benefit there. Right? So we got to take those expenses. Compare that to the other 2 where we're just paying cash. Right? And that's just the movement of cash which is separate. Okay? So that's the big difference between how we how we deal with things in accrual accounting. Right? Is where it doesn't just matter where the cash is moving, we think about the event where we get the benefit or we provide the benefit for revenues. Cool? Alright. So let's go ahead and move on to the next video.

Struggling with Principles of Accounting?

From an accrual accounting perspective, label the following events as an expense or not an expense:
An employee works all week for the company
he company pays the employee for the past two weeks of work
The company occupies a space for a month
The company pays for a year's worth of rent

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Struggling with Principles of Accounting?

From an accrual accounting perspective, label the following events as an expense or not an expense:An employee works all week for the companyhe company pays the employee for the past two weeks of workThe company occupies a space for a monthThe company pays for a year's worth of rent

Watch next

From an accrual accounting perspective, label the following events as an expense or not an expense:
An employee works all week for the company
he company pays the employee for the past two weeks of work
The company occupies a space for a month
The company pays for a year's worth of rent