Multiple Choice
If manufacturing overhead is underapplied at the end of the accounting period, which of the following adjusting entries should be made?
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3. Accrual Accounting Concepts
Adjusting Entries: Accrued Expenses
Multiple Choice
Which of the following adjusting entries for accrued expenses causes a decrease in assets?
A
Recording accrued utilities by debiting Utilities Expense and crediting Utilities Payable
B
Recording accrued interest by debiting Interest Expense and crediting Interest Payable
C
Recording accrued salaries by debiting Salaries Expense and crediting Salaries Payable
D
Recording expired prepaid insurance by debiting Insurance Expense and crediting Prepaid Insurance
Verified step by step guidance1
Step 1: Understand the concept of adjusting entries for accrued expenses. Adjusting entries are made at the end of an accounting period to record expenses that have been incurred but not yet paid or recorded. These entries ensure that the financial statements reflect the correct financial position and performance.
Step 2: Analyze the impact of each adjusting entry on the accounting equation (Assets = Liabilities + Equity). Specifically, identify whether the entry decreases assets, increases liabilities, or affects equity.
Step 3: For the first three options (Utilities Expense, Interest Expense, and Salaries Expense), note that these entries involve debiting an expense account and crediting a payable account. This increases liabilities but does not directly decrease assets.
Step 4: For the fourth option (Expired Prepaid Insurance), recognize that prepaid insurance is an asset account. When insurance expires, the adjusting entry involves debiting Insurance Expense and crediting Prepaid Insurance. This reduces the Prepaid Insurance asset account, thereby decreasing total assets.
Step 5: Conclude that the correct adjusting entry that causes a decrease in assets is 'Recording expired prepaid insurance by debiting Insurance Expense and crediting Prepaid Insurance.' This entry reflects the consumption of the prepaid insurance asset over time.
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