Accruals Quiz: 100 True or False Questions with Answers

Accruals Quiz: 50 True or False Questions with Answers and Explanations

Accrued expenses are normally reported as assets on the balance sheet.

Interest payable is a common example of a liability created by an accrued expense.

An accrued expense can cause net income to be overstated if it is omitted from the accounting records.

The main purpose of accrual adjustments is to ensure that revenues and expenses are reported in the appropriate accounting period.

Answer: True

Explanation:
Accrual adjustments are essential for applying the accrual basis of accounting correctly. They recognize revenues that have been earned but not yet recorded and expenses that have been incurred but not yet recorded. By making these adjustments, accountants ensure that the income statement reflects the economic activity of the current period and that the balance sheet reports related receivables and liabilities. Proper accrual accounting improves the accuracy, consistency, and usefulness of financial statements for decision-making.

Accruals Quiz – 50 True or False Questions

Here is a complete set of 50 True/False questions on Accruals, ready for your English-language Accounting Quiz article. Each question includes the correct answer and a detailed explanation

1. Accrual accounting recognizes revenues only when cash is received.
Answer: False
Accrual accounting recognizes revenues when they are earned, regardless of when cash is collected. This is a core principle that distinguishes it from cash-basis accounting. By recording revenue at the time the performance obligation is satisfied, the financial statements better reflect the economic activity of the period and provide more relevant information to users.

2. Accrued expenses are costs that have been incurred but not yet paid.
Answer: True
Accrued expenses represent obligations that have arisen from receiving goods or services before payment is made. Common examples include unpaid salaries, utilities, and interest. Recording them ensures expenses are matched to the correct period under the matching principle and that liabilities are properly reported on the balance sheet.

3. An adjusting entry for accrued revenue usually debits a liability account.
Answer: False
The typical adjusting entry for accrued revenue debits an asset account (such as Accounts Receivable or Accrued Receivable) and credits a revenue account. This records the right to receive cash in the future and recognizes the revenue that has already been earned in the current period.

4. Accrued interest payable is normally classified as a current liability.
Answer: True
Interest that has been incurred but not yet paid is recorded as Accrued Interest Payable. Because such interest is usually due within one year, it is presented as a current liability on the balance sheet, reflecting the short-term obligation of the entity.

5. The matching principle is the main reason companies use accruals.
Answer: True
The matching principle requires that expenses be recognized in the same period as the related revenues. Accruals allow companies to record expenses and revenues when they occur economically, even if the related cash flows take place in a different period, thereby achieving proper matching.

6. If services have been performed but not yet billed, no adjusting entry is needed under accrual accounting.
Answer: False
Under accrual accounting, revenue must be recognized when earned. When services have been performed but not yet invoiced, an adjusting entry is required to debit Accounts Receivable (or Accrued Revenue) and credit Service Revenue so that the income statement reflects the correct amount of revenue for the period.

7. Recording an accrued expense increases both liabilities and expenses.
Answer: True
The adjusting entry for an accrued expense debits an expense account and credits a liability account. This simultaneously increases total expenses (reducing net income) and increases total liabilities on the balance sheet, ensuring both the income statement and balance sheet are accurate.

8. Prepaid rent is an example of an accrued expense.
Answer: False
Prepaid rent is a deferred expense (an asset), not an accrued expense. Accruals involve recognizing an item before the related cash transaction occurs, whereas prepayments involve cash changing hands before the expense is recognized.

9. The adjusting entry for accrued interest expense debits Interest Expense and credits Interest Payable.
Answer: True
Interest accumulates over time on outstanding debt even if payment is not yet due. At period-end, the company records the expense that has been incurred and the corresponding liability, ensuring the income statement and balance sheet properly reflect the cost of borrowing for the period.

10. Under accrual accounting, revenue is recognized when it is earned.
Answer: True
Revenue recognition under the accrual basis occurs when the entity satisfies its performance obligation—typically when goods are delivered or services are rendered—regardless of the timing of cash collection. This provides a more faithful representation of the entity’s performance than cash-basis recognition.

11. Accrued revenues are also called unearned revenues.
Answer: False
Accrued revenues are amounts that have been earned but not yet billed or collected. Unearned revenues (also called deferred revenues) are the opposite: cash has been received before the revenue is earned. The two concepts are distinct and are recorded with opposite adjusting entries.

12. Omitting an accrued wage expense understates both liabilities and expenses.
Answer: True
If the adjusting entry for accrued wages is not made, the Salaries Payable liability is not recorded and the related expense is not recognized. As a result, liabilities are understated and expenses are understated, causing net income to be overstated for the period.

13. Accruals record revenues or expenses before the related cash transaction occurs.
Answer: True
By definition, accruals involve recognition of economic events prior to the exchange of cash. This contrasts with deferrals, in which cash is exchanged first and recognition occurs later. Both mechanisms are essential to proper accrual-basis financial reporting.

14. Accrued interest receivable arises when interest has been earned but not yet received.
Answer: True
When a company has interest-bearing investments or notes receivable, interest accumulates over time. At the end of the period, the portion that has been earned but not yet collected is recorded as an asset (Interest Receivable) and as Interest Revenue.

15. Accrued Expenses Payable has a normal debit balance.
Answer: False
Accrued Expenses Payable is a liability account. Liability accounts have a normal credit balance. The account is increased with credits when the accrual is recorded and decreased with debits when the obligation is paid.

16. Recording an accrued expense affects both the income statement and the balance sheet.
Answer: True
The debit to the expense account reduces net income on the income statement, while the credit to the liability account increases liabilities on the balance sheet. Cash flow is unaffected until the subsequent payment is made.

17. Debiting Salaries Expense and crediting Salaries Payable is an example of an accrual adjusting entry.
Answer: True
This entry records an expense that has been incurred but not yet paid. It is a classic example of an accrual adjustment, as opposed to a deferral adjustment or a non-cash allocation such as depreciation.

18. When an accrued utility expense is paid in the following period, the payment entry debits the expense account again.
Answer: False
The expense was already recognized in the prior period through the accrual entry. When payment is made, the company simply debits the liability (Utilities Payable) and credits Cash. Recording the expense a second time would double-count the cost.

19. GAAP and IFRS generally require the use of accrual accounting for external financial reporting.
Answer: True
Both U.S. GAAP and IFRS mandate the accrual basis of accounting for most entities preparing general-purpose financial statements. Cash-basis accounting is generally not acceptable for external reporting because it does not faithfully represent economic performance and position.

20. An accrued liability is created when an expense is incurred before cash is paid.
Answer: True
When a company receives goods or services and incurs an obligation to pay later, an accrued liability is recognized. This ensures that the related expense is recorded in the proper period and that the balance sheet reports the existing obligation.

21. The credit side of an accrued revenue adjusting entry is usually a revenue account.
Answer: True
The adjusting entry for accrued revenue debits a receivable and credits the appropriate revenue account. This recognizes the income that has been earned during the period even though cash has not yet been received.

22. Failure to record an accrued expense causes net income to be overstated.
Answer: True
Omitting the accrual means the expense is not recognized. Lower expenses result in higher net income. In addition, the related liability is understated on the balance sheet, so both the income statement and the balance sheet are misstated.

23. Accrued revenues increase assets and equity.
Answer: True
Recording accrued revenue debits an asset (receivable) and credits revenue. The increase in revenue raises net income and therefore equity. The net effect is an increase in both total assets and equity.

24. Interest earned on a note receivable but not yet collected requires an adjusting entry that debits Interest Receivable.
Answer: True
The adjusting entry recognizes the interest revenue that has been earned and records the corresponding asset. Debiting Interest Receivable and crediting Interest Revenue properly updates both the balance sheet and the income statement at period-end.

25. Wages owed to employees for the last few days of the month are an example of an accrued expense.
Answer: True
These wages have been earned by employees (and therefore incurred by the company) but have not yet been paid. Recording the accrual ensures the expense is matched to the correct period and that the liability is reported on the balance sheet.

26. Accrual accounting is closely linked to the matching principle.
Answer: True
The matching principle is implemented primarily through accrual accounting. By recognizing revenues when earned and expenses when incurred, companies can match costs with the revenues they help generate, producing a more meaningful measure of periodic performance.

27. Paying an accrued expense in a later period reduces a liability rather than recording a new expense.
Answer: True
Because the expense was already recognized when the accrual was recorded, the subsequent cash payment simply settles the liability. The entry debits the payable and credits Cash; no additional expense is recorded.

28. Most accrued expenses are classified as current liabilities.
Answer: True
Items such as accrued wages, accrued interest, and accrued utilities are typically due within one year and are therefore presented as current liabilities. Only obligations not expected to be settled within the operating cycle or one year would be classified as non-current.

29. The standard adjusting entry for accrued interest expense debits Interest Payable.
Answer: False
The correct entry debits Interest Expense (to recognize the cost) and credits Interest Payable (to record the liability). Debiting the payable would decrease the liability, which is the opposite of what is required at the time of the accrual.

30. Revenue that has been earned but not yet recorded is called accrued revenue.
Answer: True
Accrued revenue refers to amounts that the entity has earned through performance of its obligations but has not yet billed or collected. An adjusting entry is required to bring these amounts into the accounts at period-end.

31. Recording accrued salaries increases liabilities and decreases equity.
Answer: True
The debit to Salaries Expense reduces net income and therefore equity. The credit to Salaries Payable increases liabilities. Assets remain unchanged at the moment the accrual is recorded.

32. Accrual-basis financial statements are generally considered more useful than cash-basis statements.
Answer: True
By reflecting economic events in the periods in which they occur rather than when cash changes hands, accrual accounting produces information that is more relevant and faithfully representative. This is why it is required under GAAP and IFRS for most external reporting.

33. Interest earned but not yet credited by the bank is an example of accrued revenue.
Answer: True
Even if the bank has not yet posted the interest to the account, the interest has been earned over time. Under accrual accounting, the company records Interest Receivable and Interest Revenue at period-end to recognize the earned amount.

34. The adjusting entry for accrued wages affects both a temporary account and a permanent account.
Answer: True
Salaries Expense is a temporary account that will be closed to retained earnings. Salaries Payable is a permanent (balance-sheet) account that remains until the liability is settled. Both accounts are affected by the accrual entry.

35. Under accrual accounting, expenses are recognized when they are incurred.
Answer: True
Expenses are recorded in the period in which the related economic benefits are consumed or the obligation arises, not necessarily when cash is paid. This is a fundamental feature of the accrual basis of accounting.

36. Three months of interest on a $10,000, 6% note equals $150.
Answer: True
Annual interest is $10,000 × 6% = $600. Three months represent one-quarter of the year, so $600 × 3/12 = $150. This amount would be recorded as Interest Expense and Interest Payable at year-end if unpaid.

37. Accrued liabilities and accrued expenses refer to the same type of item.
Answer: True
The terms are used interchangeably. Both describe obligations that have been incurred (and therefore expensed) but have not yet been paid in cash. They appear as liabilities on the balance sheet.

38. Accruals are normally recorded through adjusting entries at the end of the accounting period.
Answer: True
Because the related cash transaction has not yet occurred, the economic event is not captured by routine daily entries. Adjusting entries at period-end are required to bring the accruals into the financial statements.

39. Recording accrued revenue increases total assets.
Answer: True
The debit side of the entry is to an asset account (Accounts Receivable or Accrued Receivable). Therefore total assets increase. The corresponding credit to revenue increases equity, keeping the accounting equation in balance.

40. Omitting the adjusting entry for accrued interest expense causes net income to be understated.
Answer: False
Omitting the entry means the interest expense is not recorded. Expenses are therefore understated and net income is overstated. Liabilities are also understated on the balance sheet.

41. Accruals improve the faithful representation and relevance of financial statements.
Answer: True
By recognizing economic events in the proper periods, accruals help financial statements more faithfully represent the entity’s performance and position and provide information that is more relevant for decision-making by users.

42. In the adjusting entry for accrued salaries, Salaries Expense is debited.
Answer: True
The expense account is debited to recognize the cost of labor that has been incurred during the period. The credit is made to Salaries Payable to record the related liability.

43. Unearned revenue is the opposite of accrued revenue.
Answer: True
Unearned revenue arises when cash is received before revenue is earned. Accrued revenue arises when revenue is earned before cash is received. They represent opposite timing differences between cash flows and revenue recognition.

44. A utility bill for December services that arrives and is paid in January should be expensed in December under accrual accounting.
Answer: True
The economic event (consumption of utilities) occurred in December. Accrual accounting requires recognition of both the expense and the related liability in December through an adjusting entry, even though the bill and payment occur later.

45. Accrued interest on a note receivable is reported as an asset.
Answer: True
Interest Receivable represents a right to receive cash in the future and is therefore classified as an asset. Whether it is current or non-current depends on the expected collection date.

46. Recording accruals is accomplished through adjusting entries.
Answer: True
Accruals that have not been captured by regular transactions during the period are brought into the accounts by means of adjusting entries made at the end of the reporting period.

47. Accrued wages and accrued interest receivable are both examples of accruals.
Answer: True
Accrued wages are an accrued expense (liability), while accrued interest receivable is an accrued revenue (asset). Both involve recognition of an economic event before the related cash transaction occurs.

48. An adjusting entry for an accrued expense increases total debits and total credits by the same amount.
Answer: True
Like all journal entries, accrual adjusting entries are balanced. The debit to the expense account equals the credit to the liability account, so total debits and total credits on the trial balance both increase by the same amount.

49. When cash is later collected for an amount previously recorded as accrued revenue, the collection entry credits the revenue account again.
Answer: False
Revenue was already recognized when the accrual was recorded. The subsequent collection simply converts the receivable into cash. The entry debits Cash and credits Accounts Receivable (or Accrued Receivable); no additional revenue is recorded.

50. Companies sometimes use reversing entries for accruals to simplify later cash transactions.
Answer: True
Optional reversing entries made at the beginning of the next period reverse the prior accruals. This allows subsequent cash payments or receipts to be recorded in the normal manner without the risk of double-counting the expense or revenue that was already accrued.

Accruals Quiz: 50 True or False Questions

“Are you ready to test your understanding of accrual accounting? Answer these 50 true or false questions and check your knowledge!”

Scoring Guide:

- 0–20 correct: Beginner – Review the basics of accrual accounting.
- 21–35 correct: Intermediate – Good understanding, but review some key concepts.
- 36–50 correct: Expert – Excellent grasp of accruals!

1. Accrual accounting recognizes revenues only when cash is received.

Answer: False
Explanation: Accrual accounting recognizes revenues when they areearned (i.e., when the performance obligation is satisfied), not when cash is received. This is a fundamental difference from cash-basis accounting. Under accrual accounting, revenue can be recognized before or after cash changes hands, ensuring that financial statements reflect the true economic activity of the period rather than merely cash movements.

2. An accrued expense is an expense that has been paid but not yet incurred.

Answer: False
Explanation: An accrued expense is exactly the opposite — it is an expense that has beenincurred (the benefit has been received) butnot yet paid in cash by the end of the accounting period. Examples include wages owed to employees, interest on loans, and utilities used but not yet billed. The term “prepaid expense” describes a payment made before incurring the cost.

3. Accrued revenues are recorded as assets on the balance sheet.

Answer: True
Explanation: Accrued revenues represent amounts that the company has earned by providing goods or services but has not yet collected in cash. Since the company has a legal right to receive payment in the future, accrued revenues are classified as current assets — typically under accounts receivable or other receivables — until the cash is actually received.

4. The matching principle requires that expenses be recorded when cash is paid out.

Answer: False
Explanation: The matching principle requires that expenses be recorded in thesame period as the revenues they help generate, regardless of when cash is paid. This means expenses are recognized when they areincurred, not when they are paid. This principle is the backbone of accrual accounting and ensures that net income accurately reflects the company’s performance for the period.

5. Accrued expenses are also known as accrued liabilities.

Answer: True
Explanation: Accrued expenses are indeed often referred to as accrued liabilities because they represent obligations that the company owes to third parties for goods or services already received. They are current liabilities on the balance sheet and include items like salaries payable, interest payable, taxes payable, and utilities payable — all of which will be settled in the near future.

6. The adjusting entry for an accrued expense involves debiting a liability and crediting an expense.

Answer: False
Explanation: The correct adjusting entry for an accrued expense is todebit the expense account (to increase expenses on the income statement) andcredit the liability account (to increase payables on the balance sheet). This properly recognizes the cost incurred during the period and the obligation to pay it in the future.

7. Accrued revenue is sometimes called unearned revenue.

Answer: False
Explanation: Accrued revenue and unearned revenue are completely opposite concepts. Accrued revenue is income that has beenearned but not yet received in cash. Unearned revenue (deferred revenue) is cashreceived in advance for goods or services that havenot yet been provided. Unearned revenue is a liability, while accrued revenue is an asset.

8. Accrual accounting is required under both IFRS and GAAP for publicly traded companies.

Answer: True
Explanation: Both the International Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles (GAAP) mandate the use of accrual accounting for financial reporting by publicly traded companies. This is because accrual accounting provides a more complete, accurate, and comparable picture of a company’s financial position and performance than cash-basis accounting.

9. Accrued expenses are reported as current liabilities on the balance sheet.

Answer: True
Explanation: Accrued expenses are classified as current liabilities because they represent short-term obligations that are expected to be paid within one year or within the normal operating cycle of the business. They appear on the balance sheet alongside other payables and are settled when the company makes the corresponding cash payment.

10. When an accrued expense is paid, the liability account is credited.

Answer: False
Explanation: When an accrued expense is paid, the liability account (e.g., Salaries Payable) isdebited to reduce the obligation, and Cash iscredited to reflect the outflow of cash. This entry removes the liability from the books and decreases the company’s cash balance, while no additional expense is recorded if the accrual was properly made.

11. Accrued revenues are recognized before cash is received.

Answer: True
Explanation: Accrued revenues are recognizedbefore cash is received because the company has already performed the service or delivered the goods — thus earning the revenue. The cash collection occurs later. This is a key feature of accrual accounting: the transaction is recorded when the economic event happens, not when cash moves.

12. The failure to record an accrued expense will result in overstating net income.

Answer: True
Explanation: If an accrued expense is not recorded, expenses on the income statement are understated. Since net income = Revenues − Expenses, understating expenses causes net income to beoverstated. Additionally, liabilities on the balance sheet are understated, giving a misleadingly positive view of the company’s profitability and financial health.

13. Accrual accounting is simpler than cash-basis accounting.

Answer: False
Explanation: Cash-basis accounting is simpler because it only records transactions when cash changes hands. Accrual accounting is more complex as it requires adjusting entries, estimates, and judgments about when revenues are earned and expenses are incurred. However, this complexity results in more accurate and useful financial statements.

14. A reversing entry for an accrued expense is optional under GAAP.

Answer: True
Explanation: Reversing entries areoptional under GAAP. They are a bookkeeping convenience used at the beginning of the next accounting period to simplify the recording of subsequent cash transactions. Companies may choose to use them or not, depending on their internal accounting procedures and the complexity of their transactions.

15. Interest payable is a common example of an accrued expense.

Answer: True
Explanation: Interest payable is a classic example of an accrued expense. When a company has borrowed money, interest accumulates over time and is incurred each day. If the interest payment date falls after the period-end, the company must accrue the interest expense and record Interest Payable as a liability, ensuring proper period matching.

16. Accrued revenues increase both assets and equity.

Answer: True
Explanation: When accrued revenue is recorded, the company debits Accounts Receivable (increasing assets) and credits Revenue (increasing equity via retained earnings). This dual effect reflects the company’s right to receive cash and the value it has created by earning revenue, both of which strengthen the company’s financial position.

17. The adjusting entry for accrued revenue is: Debit Revenue, Credit Accounts Receivable.

Answer: False
Explanation: The correct entry is the opposite:Debit Accounts Receivable andCredit Revenue. This is because the company has earned revenue but has not yet received cash. Debiting Accounts Receivable increases the asset, and crediting Revenue increases income. The reverse entry would incorrectly reduce both the receivable and the revenue.

18. Accrued expenses are also called prepaid expenses.

Answer: False
Explanation: Accrued expenses and prepaid expenses are distinct concepts. Accrued expenses are costsincurred but unpaid, while prepaid expenses are costspaid in advance for benefits that will be received in future periods. Prepaid expenses are assets (like prepaid insurance), whereas accrued expenses are liabilities.

19. Under accrual accounting, expenses are matched with revenues in the same period.

Answer: True
Explanation: This is the essence of thematching principle — one of the core concepts of accrual accounting. Expenses are recognized in the same period as the revenues they help generate, regardless of when cash is paid. This ensures that net income accurately measures the company’s performance for that specific period.

20. Accrued wages are recorded by crediting Cash.

Answer: False
Explanation: Accrued wages are recorded bycrediting Wages Payable (a liability), not Cash. Cash is not affected until the wages are actually paid. The entry is: Debit Wages Expense (to recognize the cost) and Credit Wages Payable (to record the obligation). Cash is only credited later when payment is made.

21. Accrued revenue is classified as a current asset.

Answer: True
Explanation: Accrued revenue is a current asset because it represents amounts that are expected to be collected in cash within a short period — usually within one year. It is reported as accounts receivable or other receivables on the balance sheet, reflecting the company’s right to receive payment from customers.

22. Accrual accounting is not acceptable for tax reporting purposes in any country.

Answer: False
Explanation: While some small businesses may use cash-basis accounting for tax purposes in certain jurisdictions, accrual accounting is widely accepted and often required for tax reporting by larger companies in many countries. For example, the IRS in the United States generally requires accrual accounting for businesses with inventory or those with gross receipts above a certain threshold.

23. The purpose of adjusting entries for accruals is to correct errors in the books.

Answer: False
Explanation: Adjusting entries for accruals are not made to correct errors; they are made to ensure that all revenues and expenses are recorded in the proper accounting period under the accrual basis. They are a routine part of the accounting cycle, performed at period-end to update accounts before financial statements are prepared.

24. Accrued interest on a note receivable is an example of accrued revenue.

Answer: True
Explanation: Accrued interest on a note receivable represents interest income that has been earned by the company but has not yet been received in cash. Since the company has a right to receive this interest, it is recorded as Interest Receivable (an asset) and Interest Revenue, making it a classic example of accrued revenue.

25. Reversing entries are mandatory under IFRS.

Answer: False
Explanation: Reversing entries are not mandatory under IFRS or GAAP. They are entirely optional and are used as a practical convenience to simplify bookkeeping. IFRS does not specifically address reversing entries; their use is a matter of internal policy and does not affect the accuracy of financial statements if done correctly.

26. An accrued expense adjustment affects both the income statement and the balance sheet.

Answer: True
Explanation: Every accrued expense adjustment has a dual effect: it increases an expense on the income statement (reducing net income) and increases a liability on the balance sheet (increasing obligations). This ensures that the financial statements are complete and accurately reflect both the costs incurred and the amounts owed.

27. Cash-basis accounting is more accurate than accrual accounting for measuring long-term profitability.

Answer: False
Explanation: Accrual accounting is far more accurate for measuring long-term profitability because it matches revenues with the expenses incurred to generate them. Cash-basis accounting can distort profitability by lumping together cash flows from multiple periods, making it difficult to assess the true performance and sustainability of a business.

28. Accrued expenses are recorded at the beginning of the accounting period.

Answer: False
Explanation: Accrued expenses are typically recorded at theend of the accounting period through adjusting entries. This is because the company needs to identify all costs that have been incurred but not yet paid before preparing the financial statements. Beginning-of-period entries are usually reversals of previous accruals.

29. Service performed but not yet billed is an example of accrued revenue.

Answer: True
Explanation: This is a textbook example of accrued revenue. The company has performed the service (thus earning the revenue) but has not yet issued an invoice or collected payment. The revenue must be recognized in the period the service was performed, and a receivable is recorded to show the customer’s obligation to pay.

30. Accrual accounting requires more estimates than cash-basis accounting.

Answer: True
Explanation: Accrual accounting often requires estimates for items like bad debts, warranty liabilities, and depreciation. These estimates are necessary because revenues and expenses must be matched to the periods they relate to, even when exact amounts are uncertain. Cash-basis accounting avoids these estimates because it only records actual cash transactions.

31. The account “Salaries Payable” is increased by a credit.

Answer: True
Explanation: Salaries Payable is a liability account, and liabilities have a normalcredit balance. When salaries are accrued, the company credits Salaries Payable to increase the liability. Later, when the salaries are paid, the account is debited to decrease it. This follows the standard rules of double-entry bookkeeping.

32. Accrued revenue increases cash immediately upon recording.

Answer: False
Explanation: Recording accrued revenue does not affect cash because no cash has been received yet. It increases Accounts Receivable (an asset) and Revenue. Cash is only affected later when the customer actually pays the outstanding receivable. This timing difference is the essence of the accrual basis of accounting.

33. Accrued expenses are also known as deferred expenses.

Answer: False
Explanation: Accrued expenses and deferred expenses (prepaid expenses) are different. Accrued expenses are costs incurred but not yet paid (liabilities). Deferred expenses are costs paid in advance for benefits to be received later (assets). They represent opposite timing relationships between cash payments and expense recognition.

34. The matching principle is only applicable to expenses, not revenues.

Answer: False
Explanation: The matching principle applies to both revenues and expenses. It requires that revenues be recognized when earned and that expenses be recognized in the same period as the revenues they help generate. This creates a cause-and-effect relationship that ensures net income accurately reflects the company’s performance.

35. Accrued taxes are an example of an accrued liability.

Answer: True
Explanation: Accrued taxes (such as income tax payable, sales tax payable, or property tax payable) are liabilities that arise from taxes owed but not yet paid by the period-end. They are incurred as a result of earning income or conducting taxable transactions, and they must be accrued to properly reflect the company’s obligations.

36. When an accrued revenue is collected, the receivable account is debited.

Answer: False
Explanation: When cash is collected for an accrued revenue, the companycredits Accounts Receivable to reduce the asset, anddebits Cash to increase it. The receivable is not debited again; it was already debited when the revenue was originally accrued. The collection simply converts the receivable into cash.

37. Accrual accounting is based on the realization principle.

Answer: True
Explanation: The realization principle (also called the revenue recognition principle) states that revenue should be recognized when it is earned and realizable, regardless of when cash is received. Along with the matching principle, it forms the foundation of accrual accounting, ensuring that income is recorded in the period it is generated.

38. Accrued expenses are always paid within 30 days.

Answer: False
Explanation: While many accrued expenses are current liabilities and are paid within a short time (often 30–60 days), there is no strict rule that they must be paid within 30 days. The payment terms depend on the specific agreement with the creditor. However, they are generally expected to be settled within one year.

39. The adjusting entry for accrued revenue includes a debit to a liability account.

Answer: False
Explanation: The adjusting entry for accrued revenue includes adebit to an asset account (Accounts Receivable) and acredit to a revenue account. No liability is involved because the company has already earned the income; the obligation is on the customer to pay, not on the company to provide a service.

40. Reversing entries are used to avoid double counting revenues or expenses.

Answer: True
Explanation: Reversing entries are made at the beginning of the next period to reverse the accrual entries from the prior period. This prevents double counting the revenue or expense when the actual cash transaction occurs. For example, if wages were accrued, the reversing entry ensures that the payment is recorded as an expense only once.

41. Accrued expenses are found on the income statement.

Answer: False
Explanation: Accrued expenses themselves (the liabilities) are found on thebalance sheet under current liabilities. However, theexpense portion (e.g., Salaries Expense) appears on the income statement. The accrued expense account represents the unpaid obligation, while the expense account reflects the cost incurred.

42. Under accrual accounting, it is possible to have revenue without cash inflow.

Answer: True
Explanation: Yes, under accrual accounting, revenue can be recognized without any immediate cash inflow. For example, when a company sells goods on credit, revenue is recorded at the time of sale, but cash may not be received for 30, 60, or 90 days. This is a normal and expected feature of accrual accounting.

43. The accrual basis of accounting is more complex than the cash basis.

Answer: True
Explanation: Accrual accounting is significantly more complex because it requires adjusting entries, deferrals, accruals, estimates, and a thorough understanding of the matching principle. Cash-basis accounting simply records cash receipts and payments, making it much simpler but also much less informative for decision-making purposes.

44. Accrued income is classified as a liability.

Answer: False
Explanation: Accrued income (or accrued revenue) is classified as anasset, not a liability. It represents amounts the company has earned and has a right to receive. Liabilities represent obligations to pay others; accrued income is the opposite — it’s an obligation from others to pay the company.

45. An accrued expense is recognized before the invoice is received.

Answer: True
Explanation: Accrued expenses are often recognizedbefore the company receives an invoice. For example, utility expenses for December may be accrued at year-end even though the bill arrives in January. The expense is recorded based on the company’s knowledge of services consumed, not on the receipt of a formal invoice.

46. Accrual accounting eliminates the need for adjusting entries.

Answer: False
Explanation: On the contrary, accrual accountingrequires adjusting entries to properly recognize revenues and expenses in the correct periods. Without adjusting entries, many transactions would be recorded in the wrong periods, violating the matching and revenue recognition principles. Adjusting entries are a critical part of the accrual accounting cycle.

47. Accrued expenses are generally reported as long-term liabilities.

Answer: False
Explanation: Accrued expenses are reported ascurrent liabilities, not long-term liabilities, because they are expected to be paid within one year or the normal operating cycle. Long-term liabilities are obligations due beyond one year, such as bonds payable or long-term loans. Accrued expenses are short-term by nature.

48. The matching principle supports the use of accrued expenses.

Answer: True
Explanation: The matching principle is the primary rationale for recording accrued expenses. It requires that expenses be recognized in the same period as the revenues they help generate. Accrued expenses ensure that costs like wages, interest, and utilities are matched with the period’s revenue, even if payment occurs later.

49. Accrued revenues are recorded only at year-end.

Answer: False
Explanation: Accrued revenues can be recorded atany period-end — monthly, quarterly, or annually — whenever financial statements are prepared. They are not limited to year-end. Any time a company prepares financial statements, it must adjust for accrued revenues and expenses to comply with the accrual basis of accounting.

50. Accrual accounting provides a more accurate picture of a company’s financial health than cash-basis accounting.

Answer: True
Explanation: Accrual accounting provides a more accurate and complete picture of a company’s financial health because it includes all economic events — receivables, payables, prepayments, and deferrals — not just cash transactions. It shows the company’s true profitability, obligations, and resources, giving stakeholders better information for decision-making.

Accruals Quiz: 50 True or False Questions

1. Accrual accounting recognizes revenues only when cash is physically received. Answer: False Explanation: Accrual accounting recognizes revenues when they are earned, regardless of when cash is actually received. This is a fundamental departure from cash basis accounting, which only records revenue upon cash receipt. The accrual basis provides a more accurate picture of a company’s financial performance by aligning revenues with the period in which the economic activity occurred, ensuring strict compliance with the revenue recognition principle.

2. The matching principle requires expenses to be recorded in the same period as the revenues they helped generate. Answer: True Explanation: The matching principle is a cornerstone of accrual accounting. It dictates that expenses must be recognized in the same accounting period as the revenues they helped to produce. Accruals are essential for this principle because they allow accountants to record costs, like wages or utilities, in the period the related sales occurred, even if the cash payment for those expenses happens in a subsequent period.

3. Accrued expenses represent cash paid in advance for future services or goods. Answer: False Explanation: Cash paid in advance for future services or goods is classified as a prepaid expense (a deferral), not an accrued expense. An accrued expense represents a cost that a company has already incurred during the current accounting period but has not yet paid or received an invoice for. Examples include salaries earned by employees at month-end but paid next month.

4. Accrued revenue is recognized when cash is received before services are performed. Answer: False Explanation: Cash received before services are performed is classified as unearned (or deferred) revenue, which is a liability. Accrued revenue, on the other hand, refers to income that has been earned by providing goods or services during the accounting period, but the cash has not yet been received, and no invoice has been sent to the customer.

5. Adjusting journal entries for accruals always involve the Cash account. Answer: False Explanation: Adjusting entries for accruals never involve the Cash account. By definition, accruals are made precisely because the cash exchange has not yet occurred. The purpose of the adjustment is to recognize the revenue or expense in the correct period and establish a receivable or payable. The actual cash transaction will be recorded in a future period.

6. An accrued expense increases both total expenses on the income statement and total liabilities on the balance sheet. Answer: True Explanation: To record an accrued expense, the adjusting journal entry involves debiting an expense account and crediting a liability account (e.g., Accrued Expenses Payable). This entry increases total expenses, which reduces net income, and simultaneously increases current liabilities, accurately reflecting the company’s obligation to pay for the incurred cost in the near future.

7. Accrued revenues are classified as current liabilities on the balance sheet. Answer: False Explanation: Accrued revenues represent amounts that a company has a right to collect in cash for goods or services already delivered. Since these amounts are expected to be collected within the normal operating cycle or one year, they are classified as current assets on the balance sheet, often grouped with accounts receivable.

8. Reversing entries are mandatory under GAAP for all accrued transactions. Answer: False Explanation: Reversing entries are optional, not mandatory, under Generally Accepted Accounting Principles (GAAP). They are made on the first day of a new accounting period and are the exact opposite of the prior period’s accrual adjusting entries. Their primary purpose is to simplify bookkeeping when the actual cash transaction occurs later, preventing double-counting of expenses or revenues.

9. Failing to record an accrued expense will overstate net income for the accounting period. Answer: True Explanation: Failing to record an accrued expense means the expense is omitted from the income statement, which artificially inflates (overstates) net income. Simultaneously, the corresponding liability is not recorded on the balance sheet, leading to understated total liabilities. This misrepresentation can mislead stakeholders about the company’s true profitability and financial obligations.

10. Accrued interest expense is typically calculated using the formula: Principal × Annual Interest Rate × Time. Answer: True Explanation: Accrued interest is calculated using the simple interest formula: Principal multiplied by the Annual Interest Rate, multiplied by Time (expressed as a fraction of a year). For example, a $10,000 loan at 6% annual interest accrues $50 in interest for one month ($10,000 × 0.06 × 1/12). This amount is then recorded as an accrued expense.

11. Unearned revenue is considered a type of accrued revenue. Answer: False Explanation: Unearned revenue and accrued revenue are opposites in terms of cash timing. Unearned revenue is a deferral where cash is received before the service is performed, creating a liability. Accrued revenue is when the service is performed before cash is received, creating an asset. They require entirely different accounting treatments and journal entries.

12. Salaries earned by employees in the last week of December but paid in January must be accrued in December. Answer: True Explanation: Since the employees provided their labor in December, the company incurred the cost of that labor in December. To adhere to the matching principle, an adjusting entry must be made in December to debit Salaries Expense and credit Salaries Payable, ensuring the expense is matched against December’s revenues.

13. Accruals are primarily used by management to manipulate earnings and avoid paying taxes. Answer: False Explanation: While unethical management could theoretically misuse estimates, the primary and legitimate purpose of accruals is to provide a faithful representation of a company’s economic reality. Accruals ensure that financial statements comply with GAAP or IFRS by matching revenues and expenses to the correct periods, offering transparency to investors, creditors, and tax authorities.

14. The time period assumption in accounting necessitates the use of accruals to report financial results accurately. Answer: True Explanation: The time period assumption states that a business’s ongoing life can be divided into artificial periods (months, quarters, years) for reporting. Because business transactions often span across these arbitrary cutoff dates, accruals are necessary. They ensure that the financial results reported for a specific period accurately reflect the economic activities of that exact timeframe.

15. An “accrued asset” is another accounting term for an accrued expense. Answer: False Explanation: An accrued asset is actually another name for accrued revenue. It represents a company’s right to receive cash in the future for goods or services that have already been delivered or performed in the current period. An accrued expense, conversely, is a liability representing an obligation to pay cash in the future.

16. If a company fails to accrue earned revenue, its total assets and net income will be understated. Answer: True Explanation: Omitting an accrued revenue adjustment means the earned revenue is not recognized, which artificially deflates (understates) net income on the income statement. Additionally, the corresponding asset (receivable) is not recorded on the balance sheet, leading to understated total assets. This makes the company appear less profitable than it actually is.

17. Prepaid insurance is a classic example of an accrued expense. Answer: False Explanation: Prepaid insurance is a deferred expense (or prepaid asset), not an accrued expense. It represents cash paid in advance for coverage that will be consumed in future periods. An accrued expense, by contrast, is a cost that has already been consumed or incurred, but for which cash has not yet been paid.

18. Accrued liabilities are typically classified as current liabilities because they are settled within one year. Answer: True Explanation: Accrued expenses are obligations that a company expects to settle within its normal operating cycle or within one year, whichever is longer. Therefore, they are classified as current liabilities on the balance sheet. This classification helps financial statement users assess the company’s short-term liquidity and working capital requirements accurately.

19. On the statement of cash flows (indirect method), an increase in accrued expenses is added back to net income. Answer: True Explanation: Under the indirect method, the cash flow statement starts with net income. Since an increase in accrued expenses reduced net income but did not involve an actual cash outflow during the period, this non-cash expense must be added back to net income. This adjustment reconciles accrual-based net income to actual cash provided by operations.

20. Recording accrued revenue requires a debit to a revenue account and a credit to an asset account. Answer: False Explanation: The correct adjusting journal entry for accrued revenue involves debiting an asset account (such as Accrued Revenue or Accounts Receivable) and crediting a revenue account. This entry increases total revenues on the income statement and increases current assets on the balance sheet, representing the right to collect cash.

21. Under the strict cash basis of accounting, accruals are still recorded at year-end. Answer: False Explanation: Under the strict cash basis of accounting, the concepts of accrued revenues and accrued expenses do not exist. Transactions are only recorded in the accounting system when cash is physically received or disbursed. Therefore, no adjusting entries for accruals are made, which is why cash basis statements are not GAAP-compliant for external reporting.

22. Accrued warranty expense is estimated and recorded in the same period as the related product sales. Answer: True Explanation: According to the matching principle, the estimated cost of future warranty claims must be recognized as an expense in the same period that the related product sales revenue is recorded. Companies use historical data to estimate this cost, debiting Warranty Expense and crediting Accrued Warranty Liability, ensuring the income statement reflects the true cost of those sales.

23. A reversing entry for an accrued expense involves debiting the payable account and crediting the expense account. Answer: True Explanation: A reversing entry is the exact opposite of the original adjusting entry. Since the original entry to record the accrued expense was a debit to Expense and a credit to Payable, the reversing entry on the first day of the new period will be a debit to Payable and a credit to Expense, simplifying future cash recording.

24. Accruals ensure that financial statements reflect the economic reality of transactions, not just cash movements. Answer: True Explanation: The fundamental value of accrual accounting lies in its ability to capture economic reality. By recognizing revenues when earned and expenses when incurred, accruals eliminate the timing distortions of cash flows. This provides investors, creditors, and management with a much more reliable and comprehensive view of a company’s true operational performance and financial health.

25. Accounts Payable and accrued expenses are exactly the same and can be used interchangeably. Answer: False Explanation: While both represent obligations to pay, they are not interchangeable. Accounts Payable typically arises when a formal vendor invoice has been received for specific goods or services. Accrued expenses, however, are recognized at period-end for costs incurred where no invoice has yet arrived, such as estimated utility bills or wages. Accruals are often estimates.

26. Accrued vacation pay is a liability because employees have already earned the right to paid time off. Answer: True Explanation: As employees work, they earn the right to paid time off. The cost of this earned but unused vacation time is a present obligation for the company. Therefore, the estimated cost of accrued vacation pay must be recorded as an expense and a current liability in the period the employee earns it, not when they take the time off.

27. Recording an accrued revenue decreases a company’s working capital. Answer: False Explanation: Working capital equals Current Assets minus Current Liabilities. Recording accrued revenue involves debiting a current asset (e.g., Accrued Revenue Receivable) and crediting revenue. This increases total current assets without affecting current liabilities. Consequently, the overall working capital increases, reflecting the additional short-term economic resources the company has earned.

28. Dividends declared by the board of directors create an accrued liability called Dividends Payable. Answer: True Explanation: Once the board of directors formally declares a cash dividend, the company incurs a legal obligation to pay its shareholders. At this declaration date, an entry is made to debit Retained Earnings and credit Dividends Payable, which is an accrued current liability. Dividends are a distribution of equity, not an operating expense.

29. The materiality concept allows immaterial accruals to be omitted or recorded when cash is paid to save time. Answer: True Explanation: The materiality concept allows accountants to use professional judgment. If an accrued amount is so small that its omission would not influence the economic decisions of financial statement users, it may be deemed immaterial. In such cases, companies might choose to record the expense only when cash is paid, simplifying the accounting process without misleading stakeholders.

30. The percentage-of-completion method in long-term construction accounting relies heavily on accrual concepts. Answer: True Explanation: The percentage-of-completion method is a prime example of accrual accounting. It requires companies to recognize revenue and gross profit proportionally as work is performed over time, rather than waiting until the project is finished or cash is received. This involves accruing revenues for work completed but not yet billed, reflecting ongoing economic activity.

31. Accrued expenses are reported on the income statement as long-term liabilities. Answer: False Explanation: Accrued expenses are reported on the balance sheet, not the income statement, as current liabilities (since they are typically due within one year). The corresponding expense amount is reported on the income statement. They are rarely classified as long-term liabilities unless the payment is explicitly deferred beyond one year, which is uncommon for typical accruals.

32. If an accrued expense is not reversed, paying the invoice later might result in double-counting the expense. Answer: True Explanation: If an accrued expense is not reversed, the liability remains on the books. When the actual cash payment is made later, a bookkeeper might mistakenly debit the Expense account again instead of debiting the Payable account. This would result in double-counting the expense, artificially lowering net income in the period of payment. Reversing entries prevent this error.

33. Accrued revenue is recognized only when the customer is formally invoiced. Answer: False Explanation: Accrued revenue is recognized when the service is performed or goods are delivered, which often occurs before the formal invoicing process takes place. For example, a consultant may accrue revenue for work done in the last week of the month, but the actual invoice might not be generated until the 5th of the next month.

34. Employer payroll taxes incurred in December but paid in January should be expensed in January. Answer: False Explanation: The employer’s portion of payroll taxes is an additional cost of employing workers, incurred in the same period the employees work. Therefore, even if the tax remittance to the government occurs in January, the expense and the corresponding liability must be accrued in December. This ensures the total cost of labor is accurately matched against December’s revenues.

35. Accrual basis accounting is required by both GAAP and IFRS for most businesses. Answer: True Explanation: Both Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) mandate the accrual basis for most businesses. This is because it provides a more accurate, complete, and faithful representation of a company’s financial health, allowing investors and creditors to make better-informed economic decisions based on true operational performance rather than cash timing.

36. An increase in accrued revenues is deducted from net income when preparing the operating activities section of the cash flow statement. Answer: True Explanation: An increase in accrued revenue means that revenue was recognized on the income statement, boosting net income, but the cash has not yet been collected. To reconcile net income to actual cash flow from operations, this non-cash revenue increase must be deducted from net income, ensuring the cash flow statement reflects only cash actually received.

37. Accrued expenses represent a company’s right to receive cash in the future. Answer: False Explanation: Accrued expenses represent a company’s obligation to pay cash in the future for goods or services already received. It is a liability. The right to receive cash in the future for goods or services already provided is called accrued revenue (or an accrued asset), which is an entirely different concept.

38. Legal services received in December but invoiced in January should be accrued in December. Answer: True Explanation: Since the legal services were consumed and the obligation was incurred in December, the expense belongs in December’s financial statements. The company should make an adjusting entry in December to debit Legal Expense and credit Accrued Liabilities. This ensures compliance with the matching principle, regardless of when the physical invoice is received.

39. Accruals eliminate the need for companies to maintain a bank account or track cash flows. Answer: False Explanation: Accruals do not eliminate the need for cash tracking; in fact, the statement of cash flows is a mandatory financial statement under accrual accounting. While accruals focus on economic performance, cash remains the lifeblood of any business. Companies must still meticulously track cash inflows and outflows to manage liquidity, pay obligations, and survive.

40. The primary purpose of an accrual is to match cash inflows with cash outflows in the same period. Answer: False Explanation: The primary purpose of an accrual is to match revenues earned with the expenses incurred to generate them, regardless of cash flow timing. Matching cash inflows with cash outflows is the objective of cash basis accounting or cash flow management, not accrual accounting. Accruals deliberately decouple recognition from cash movement.

41. Accrued income taxes represent taxes already paid to the government in advance. Answer: False Explanation: Accrued income taxes represent the estimated tax obligations a company has incurred based on its taxable income for the current accounting period, but which have not yet been remitted to the government. Taxes paid in advance would be classified as a prepaid asset (Deferred Tax Asset or Prepaid Taxes), not an accrued liability.

42. A SaaS company billing customers in arrears must accrue revenue monthly as the service is provided. Answer: True Explanation: SaaS companies deliver their service continuously over time. If they bill customers in arrears (e.g., at the end of a quarter for the past three months), they must still accrue the revenue monthly. An adjusting entry is made each month to debit Accrued Revenue and credit Service Revenue, ensuring the income statement reflects the value provided during that specific month.

43. Accruing a large expense at year-end increases a company’s debt-to-equity ratio. Answer: True Explanation: The debt-to-equity ratio is Total Liabilities divided by Total Equity. Accruing a significant expense increases Total Liabilities (via an accrued payable). Simultaneously, the higher expense reduces Net Income, which in turn reduces Retained Earnings (a component of Total Equity). With the numerator increasing and the denominator decreasing, the debt-to-equity ratio will increase.

44. Adjusting entries for accruals are prepared after the financial statements have been issued to the public. Answer: False Explanation: Adjusting entries for accruals are a crucial part of the accounting cycle. They are prepared at the end of the accounting period after the unadjusted trial balance is complete, but strictly before the financial statements are generated and issued. This timing ensures that all revenues earned and expenses incurred are captured in the final reports.

45. Unconditional pledges to give in nonprofit accounting are accrued as revenue when the promise is made. Answer: True Explanation: Under accrual accounting for nonprofits, unconditional promises to give (pledges) are considered earned when the pledge is made, provided the amount is measurable and collection is probable. Therefore, the nonprofit should accrue this as contribution revenue and a corresponding receivable in the current period, rather than waiting for the cash to be physically received.

46. Accrued expenses are always based on exact, finalized third-party invoices. Answer: False Explanation: Accrued expenses are frequently based on management estimates precisely because the finalized third-party invoice has not yet arrived. For example, utility bills or year-end bonuses are accrued based on historical data, contracts, or reasonable estimates. If an exact invoice were already present, the transaction would typically be recorded as a standard Account Payable, not an accrual.

47. Recording an accrued expense has no impact on a company’s working capital. Answer: False Explanation: Working capital is calculated as Current Assets minus Current Liabilities. When an accrued expense is recorded, it increases a current liability (e.g., Salaries Payable) without affecting current assets. As a result, the denominator in the working capital equation increases, leading to a direct decrease in total working capital, reflecting the new short-term obligation.

48. The revenue recognition principle is violated if a company fails to accrue earned but unbilled revenue. Answer: True Explanation: The revenue recognition principle states that revenue should be recognized when it is earned and realizable, regardless of when cash is received. If a company performs a service but fails to accrue the revenue because it hasn’t billed the client yet, it violates this principle. This omission understates both revenue and assets, misrepresenting financial performance.

49. Accruals are considered a low-risk area during financial statement audits. Answer: False Explanation: Accruals are actually considered a higher audit risk area. This is because they frequently require management to make subjective estimates and judgments, such as estimating unpaid utilities, accrued bonuses, or warranty costs. Since these figures lack finalized third-party invoices, there is a higher inherent risk of material misstatement, whether due to unintentional error or intentional earnings management.

50. Accrued revenues and deferred revenues are the same accounting concept. Answer: False Explanation: They are fundamentally different. Accrued revenue is earned before cash is received (Asset). Deferred (or unearned) revenue is cash received before it is earned (Liability). Accruals bring forward recognition to match economic activity, while deferrals push recognition forward to match the eventual earning process. They require opposite journal entries and serve different purposes.

Accruals True or False Quiz: Part 1 (Questions 1 – 10)

Question 1

True or False: Accrued expenses represent expenses that have been paid in cash before the related goods or services are received.

Correct Answer: False
Explanation: An accrued expense is an expense that has been incurred (the good or service was consumed) during the period, but cash has not yet been paid or recorded. Payment occurs after the expense is recognized. The statement actually describes a prepaid expense (a deferral), where cash is paid upfront before the expense benefit is realized. Under accrual accounting, expenses must be recognized when consumed regardless of cash flow timing, ensuring that liabilities and expenses are reported accurately in the current period. (85 words)

Question 2

True or False: Accrued revenues increase both total assets and stockholders’ equity on the balance sheet.

Correct Answer: True
Explanation: When a company records an adjusting entry for accrued revenue, it debits an asset account (such as Accounts Receivable or Accrued Revenues Receivable) and credits a revenue account (such as Service Revenue). The debit directly increases Total Assets. The credit increases net income on the Income Statement, which subsequently flows into Retained Earnings upon closing. Because Retained Earnings is a component of equity, Stockholders’ Equity increases as well. Thus, accruing earned revenue expands both sides of the balance sheet equation equally. (85 words)

Question 3

True or False: Adjusting journal entries for accruals never involve the Cash account.

Correct Answer: True
Explanation: The primary purpose of an adjusting entry for an accrual is to record economic transactions that occurred during the period where cash has not yet changed hands. Cash movements are recorded during routine daily bookkeeping when actual payments or collections take place. Including Cash in an adjusting entry would violate the basic framework of period-end adjustments under GAAP and IFRS. Consequently, accrual adjusting entries strictly affect one or more Income Statement accounts (revenues or expenses) and one or more Balance Sheet accounts (assets or liabilities). (85 words)

Question 4

True or False: If a company fails to record an accrued utility expense at year-end, net income will be understated.

Correct Answer: False
Explanation: Omitting an accrued expense entry means the company fails to debit the expense account, causing total expenses on the Income Statement to be reported too low. Because expenses are understated, net income will be overstated, not understated. Additionally, because the corresponding liability account (Utilities Payable) was not credited, total liabilities on the Balance Sheet will also be understated. This dual distortion misrepresents the company’s financial results by presenting higher profitability and lower debt than actually exist. (82 words)

Question 5

True or False: Interest expense accrues continuously over time based on the principal, interest rate, and time elapsed.

Correct Answer: True
Explanation: Interest cost accumulates continuously over the life of a loan or note payable as a function of time. The formula Principal × Rate × Time determines the amount accrued during any specific period. Even if interest payments are scheduled quarterly or annually, a business must record an adjusting entry at the end of every reporting period to debit Interest Expense and credit Interest Payable. This ensures that the cost of borrowing for that specific timeframe is properly recognized under the matching principle. (84 words)

Question 6

True or False: Accrued liabilities are classified as long-term assets on the Balance Sheet.

Correct Answer: False
Explanation: Accrued liabilities (such as Salaries Payable, Interest Payable, or Taxes Payable) represent short-term obligations owed to employees, lenders, or governments for services already received. Because these debts are typically due within the company’s operating cycle or 12 months, they are classified as Current Liabilities on the Balance Sheet—not long-term assets. Assets represent economic resources owned by the firm, whereas liabilities represent claims by creditors against those resources that must be settled using cash or current assets. (81 words)

Question 7

True or False: The Revenue Recognition Principle requires companies to record accrued revenue when cash is received from the customer.

Correct Answer: False
Explanation: The Revenue Recognition Principle states that revenue must be recognized in the accounting period in which the performance obligation is satisfied—meaning when services are delivered or goods are transferred to the customer. Under accrual accounting, revenue is recognized regardless of when cash is collected. Waiting until cash is received describes cash-basis accounting, which is not permitted under GAAP or IFRS. Accruing revenue ensures that income earned near period-end is reflected in current financial reports before payment arrives. (83 words)

Question 8

True or False: An adjusting entry for an accrued expense results in a debit to a liability account and a credit to an expense account.

Correct Answer: False
Explanation: The entry described is backwards. An adjusting entry for an accrued expense requires a debit to an expense account (to increase expenses on the Income Statement) and a credit to a liability account (to increase obligations on the Balance Sheet). Debiting a liability and crediting an expense would decrease both, which is incorrect when recognizing an unrecorded operational cost. The correct entry ensures costs consumed during the period lower net income while establishing the unpaid debt on the balance sheet. (84 words)

Question 9

True or False: Under cash-basis accounting, period-end adjusting entries for accruals are mandatory.

Correct Answer: False
Explanation: Cash-basis accounting recognizes revenues only when cash is received and expenses only when cash is paid out. Because cash-basis accounting ignores the timing of economic activity and focuses solely on cash flows, period-end adjusting entries for accruals and deferrals are completely omitted. Adjusting entries for accruals are mandatory exclusively under accrual-basis accounting, which complies with GAAP and IFRS by applying the matching and revenue recognition principles to present a true financial position. (80 words)

Question 10

True or False: Reversing entries made at the beginning of a new period are optional bookkeeping procedures for accruals.

Correct Answer: True
Explanation: Reversing entries are optional accounting procedures executed on the first day of a new fiscal period. They reverse the period-end adjusting entries made for accruals in the preceding period. Their sole purpose is administrative efficiency: they simplify the accounting process when routine cash payments or receipts occur later in the new period, eliminating the need for bookkeepers to manually separate the prior accrued portion from current expense or revenue. Financial statements remain identical whether reversing entries are used or omitted. (84 words)

Accruals True or False Quiz: Part 2 (Questions 11 – 30)

Question 11

True or False: Accrued interest revenue is recorded with a debit to Interest Revenue and a credit to Interest Receivable.

Correct Answer: False
Explanation: The required journal entry is inverted. Accrued interest revenue represents earned income that has not yet been collected in cash. To record this, the business must debit Interest Receivable (an asset account) to establish the right to receive cash in the future. Simultaneously, it must credit Interest Revenue (a revenue account) to report the earnings on the Income Statement for the period. Debiting revenue and crediting receivables would incorrectly decrease both income and assets, violating basic accrual accounting rules. (83 words)

Question 12

True or False: Settling an accrued liability by paying cash decreases total assets and decreases total liabilities, leaving net income unaffected.

Correct Answer: True
Explanation: When a company pays off an accrued obligation (such as paying Accrued Salaries Payable or Interest Payable), the adjusting entry to recognize the expense was already completed at period-end. The settlement entry debits Salaries Payable (decreasing liabilities) and credits Cash (decreasing assets). Because the underlying expense was already matched against earnings in the prior period, paying the debt reduces both sides of the Balance Sheet equally without impacting the current period’s Income Statement or Net Income. (82 words)

Question 13

True or False: Deferrals and accruals are identical because both involve recording cash before economic activity occurs.

Correct Answer: False
Explanation: Accruals and deferrals are opposites regarding the timing of cash flows relative to economic activity. In an accrual, the economic event occurs first (revenue earned or expense incurred), and cash is exchanged later. In a deferral (such as prepaid rent or unearned revenue), cash changes hands upfront before the actual service, product, or benefit is delivered or consumed. Conflating the two creates fundamental errors when preparing period-end adjusting entries and evaluating balance sheet accounts. (80 words)

Question 14

True or False: Failing to accrue earned service revenue at the end of an accounting period causes total assets on the balance sheet to be understated.

Correct Answer: True
Explanation: Accrued revenue adjusting entries record earned income that has not yet been billed or collected. The entry requires debiting an asset account (Accounts Receivable or Accrued Revenue Receivable) and crediting a revenue account. Omitting this adjustment means the receivable is not added to the ledger, causing reported Total Assets to be understated. Furthermore, because revenues are omitted, Net Income and Stockholders’ Equity will also be understated, presenting an inaccurate, depressed picture of the firm’s financial standing. (82 words)

Question 15

True or False: Accrued salaries expense represents labor costs incurred by employees during the current period that will be paid in a future period.

Correct Answer: True
Explanation: Payroll cycles rarely align perfectly with the end of an accounting period. When employees work during the final days of a period but payday falls in the following cycle, the business has consumed labor resources that must be reported immediately. Accruing salaries expense involves debiting Salaries Expense to record the cost on the current Income Statement and crediting Salaries Payable to report the current liability on the Balance Sheet, adhering strictly to the matching principle. (82 words)

Question 16

True or False: An accrued expense adjusting entry increases expenses while simultaneously increasing current liabilities.

Correct Answer: True
Explanation: The adjusting entry for an accrued expense requires a debit to an expense account (such as Utilities Expense, Rent Expense, or Interest Expense) and a credit to a liability account (such as Accrued Expenses Payable). The debit entry increases total operational expenses on the Income Statement, which lowers Net Income. The credit entry creates or increases an obligation on the Balance Sheet under current liabilities, ensuring that all debts owed at period-end are fully disclosed to financial statement users. (82 words)

Question 17

True or False: If a tenant pays rent six months in advance, the landlord must record an accrued revenue adjusting entry at period-end.

Correct Answer: False
Explanation: Advance rent payments represent cash received before the service is provided, which is classified as a deferral (unearned revenue), not an accrual. When cash is collected upfront, the landlord records a liability (Unearned Rent Revenue). At period-end, an adjusting entry is made to convert the earned portion from unearned revenue into earned Rent Revenue. Accrued revenue applies only when services are rendered prior to receiving cash, making an accrual entry inappropriate for advance payments. (81 words)

Question 18

True or False: Under the Matching Principle, sales commissions earned by staff in December must be accrued in December, even if paid in January.

Correct Answer: True
Explanation: The Expense Recognition (Matching) Principle dictates that expenses directly associated with generating specific revenues must be recognized in the same accounting period as those revenues. Because the December sales generated revenue in December, the corresponding sales commissions represent a cost of earning that revenue. The company must accrue the commission expense on December 31 by debiting Commission Expense and crediting Commissions Payable, regardless of when cash is disbursed to employees in January. (81 words)

Question 19

True or False: Accrued income tax expense is reported as a non-current liability on the balance sheet.

Correct Answer: False
Explanation: Income taxes accrued on the current year’s operating profit represent short-term obligations owed to government tax authorities. Because corporate tax liabilities are due within the upcoming tax filing deadline (typically a few months following year-end and well within the 12-month operating cycle), Income Tax Payable is classified as a Current Liability on the Balance Sheet. Non-current liabilities are reserved for long-term debts due beyond one year, such as long-term bonds or mortgages. (80 words)

Question 20

True or False: Accrual accounting provides a more accurate picture of a company’s profitability than cash-basis accounting.

Correct Answer: True
Explanation: Cash-basis accounting records income and expenses solely when cash moves, creating artificial volatility in reported profits caused by delayed collections or advance lump-sum disbursements. Accrual accounting eliminates these distortions by recognizing revenues when earned and matching related expenses in the exact period they are incurred. This provides investors, creditors, and management with a true measurement of operational performance and economic health, which is why accrual accounting is required by GAAP and IFRS framework standards. (81 words)

Question 21

True or False: A company holding a note receivable with accumulated unpaid interest must accrue interest expense at period-end.

Correct Answer: False
Explanation: Holding a note receivable means the company has loaned money to another entity and is entitled to receive interest. Therefore, the accumulated unpaid interest represents Interest Revenue (an asset/revenue accrual), not interest expense. The company must debit Interest Receivable and credit Interest Revenue. Interest expense is recorded by the borrower who owes the interest on a note payable. Mistaking interest earnings for borrowing costs misclassifies income as an expense. (80 words)

Question 22

True or False: The basic accounting equation remains balanced after recording an adjusting entry for an accrued expense.

Correct Answer: True
Explanation: The accounting equation is Assets = Liabilities + Equity. Recording an accrued expense involves debiting an expense account and crediting a liability account. The credit increases Liabilities. The debit increases total expenses on the Income Statement, which reduces Net Income. When closed, lower Net Income reduces Retained Earnings within Stockholders’ Equity. Because liabilities increase by the exact same amount that equity decreases, total claims on the right side of the equation remain equal to total assets on the left. (85 words)

Question 23

True or False: Accrued revenues are classified as unearned liabilities on the Balance Sheet until collected.

Correct Answer: False
Explanation: Accrued revenues represent services or products already delivered for which payment has not yet been collected. Because the economic activity is complete, the company holds a legal claim to receive cash, making accrued revenue an Asset (such as Accounts Receivable). “Unearned liabilities” (Unearned Revenue) represent the opposite situation: cash collected from customers before work has been performed, creating an obligation to fulfill services in the future. (77 words)

Question 24

True or False: Adjusting entries for accruals are required under the Time Period Concept.

Correct Answer: True
Explanation: The Time Period Concept assumes that the economic life of a business can be divided into distinct artificial time intervals, such as months, quarters, or years. Because ongoing business operations do not naturally pause at period-end, transactions often span multiple periods. Period-end accrual adjustments are necessary to assign revenues earned and expenses incurred to their specific time frames, ensuring that financial reports accurately reflect performance over each discrete operating period. (78 words)

Question 25

True or False: An accrued expense adjustment decreases net income on the Income Statement.

Correct Answer: True
Explanation: An adjusting entry for an accrued expense involves debiting an expense account and crediting a liability account. Debiting an expense account increases total operating expenses for the period. Because net income is calculated as total revenues minus total expenses, any increase in expenses directly reduces Net Income. Failing to record the accrual would leave expenses understated and net income artificially inflated, misleading users about the firm’s actual operating results. (76 words)

Question 26

True or False: If a company pays an utility bill in full upon receipt during the middle of the month, a year-end accrual adjustment is still required for that payment.

Correct Answer: False
Explanation: If a utility bill covers services consumed within the period and is received and paid in cash during that same period, the transaction was already recorded in routine bookkeeping (debiting Utilities Expense and crediting Cash). No further adjusting entry is required at year-end for that specific invoice. Period-end accrual entries are necessary only for unrecorded expenses that were consumed during the period but remain unpaid and unbilled at the reporting date. (80 words)

Question 27

True or False: Accrued warranty expense is recognized in the period the product is repaired rather than the period the sale occurs.

Correct Answer: False
Explanation: Under the matching principle, warranty costs must be estimated and accrued in the same period the related product sale is recognized, not when repairs are executed in future periods. At year-end, the company debits Warranty Expense and credits Estimated Warranty Liability based on expected claims. Accruing warranty costs at the time of sale matches the anticipated expense against current sales revenue, preventing future periods from absorbing costs created by past sales. (82 words)

Question 28

True or False: On the Statement of Cash Flows (indirect method), an increase in accrued liabilities is added back to net income.

Correct Answer: True
Explanation: The indirect method starts with Net Income and adjusts for non-cash items to calculate operating cash flow. An increase in accrued liabilities (such as Accrued Salaries Payable) indicates that expenses were recorded on the Income Statement—reducing Net Income—but no cash was paid out during the period. Because this expense did not consume cash, the increase in the liability balance must be added back to Net Income to accurately reflect actual operating cash flows. (81 words)

Question 29

True or False: Recording accrued revenue requires a credit entry to an asset account.

Correct Answer: False
Explanation: Asset accounts increase with debit entries and decrease with credit entries. Accrued revenue represents a new or increasing asset (a claim to cash for services rendered), so the asset account (such as Accounts Receivable) must be debited, not credited. The credit entry is applied to a revenue account (such as Service Revenue) to reflect income earned. Crediting an asset account would incorrectly imply a reduction in economic resources owned by the business. (77 words)

Question 30

True or False: Reversing entries alter the final financial statement figures reported at year-end.

Correct Answer: False
Explanation: Reversing entries are executed on the first day of a new accounting period as an optional bookkeeping simplification. They simply reverse the period-end adjusting entries made for accruals in the prior period so that subsequent routine cash transactions can be recorded without splitting amounts between payables/receivables and expenses/revenues. Because reversing entries occur after financial statements for the prior period have been finalized and closed, they have zero impact on reported financial statement figures. (80 words)

Accruals True or False Quiz: Part 3 (Questions 31 – 50)

Question 31

True or False: Accrued liabilities represent expenses that have been paid in advance but not yet consumed.

Correct Answer: False
Explanation: Accrued liabilities are obligations to pay for goods or services that have already been consumed or received during the period, but for which payment has not yet been made. In contrast, payments made in advance for expenses that have not yet been consumed are classified as prepaid expenses (deferral assets). Confusing accrued liabilities with deferred expenses misstates both asset and liability categories on the balance sheet and distorts operating cash flow analysis. (79 words)

Question 32

True or False: An adjusting entry for accrued revenue increases net income on the Income Statement.

Correct Answer: True
Explanation: Accrued revenue adjusting entries record earned income that has not yet been billed or collected. The journal entry requires a debit to an asset account (such as Accounts Receivable) and a credit to a revenue account (such as Service Revenue). Because crediting a revenue account increases total revenues on the Income Statement while operating expenses remain unchanged, the overall effect of the adjusting entry is an immediate increase in net income for the period. (79 words)

Question 33

True or False: Interest on a note payable accrues only at the maturity date of the loan.

Correct Answer: False
Explanation: Interest expense accrues continuously over time as a function of the principal amount, annual interest rate, and time elapsed. Although the actual cash payment may only be due at the note’s maturity date, financial accounting rules require companies to record adjusting entries at the end of each reporting period. Accruing interest at period-end ensures that borrowing costs are recognized in the period the capital was utilized, complying fully with the matching principle. (78 words)

Question 34

True or False: Omitting an accrued expense adjusting entry causes total liabilities on the Balance Sheet to be understated.

Correct Answer: True
Explanation: Accrued expense adjusting entries involve debiting an expense account and crediting a current liability account (such as Accrued Payables). If a company fails to make this adjustment at year-end, the liability account will not reflect the unpaid obligation. Consequently, total liabilities reported on the Balance Sheet will be understated. Furthermore, because the expense was omitted, net income and equity will be overstated, presenting an unearned, overly favorable financial position. (78 words)

Question 35

True or False: Accrued interest on an investment is recognized as an expense by the investor.

Correct Answer: False
Explanation: For an investor holding an interest-bearing asset (such as a bond or note receivable), accumulated unpaid interest represents earned income, not a borrowing cost. The investor must record accrued interest by debiting Interest Receivable (an asset) and crediting Interest Revenue. Interest expense is recorded exclusively by the borrower who owes the interest on a debt obligation. Misclassifying investment earnings as an expense reverses the true economic impact of the transaction. (78 words)

Question 36

True or False: Cash-basis accounting recognizes revenue when services are rendered, regardless of cash collection.

Correct Answer: False
Explanation: Cash-basis accounting recognizes revenue strictly when cash is received from the customer, completely ignoring when services are performed or products are delivered. The practice of recognizing revenue when earned, regardless of cash flow, is the defining characteristic of accrual-basis accounting. Because cash-basis accounting fails to align earnings with operational effort, it is not compliant with Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). (75 words)

Question 37

True or False: Accrued rent expense requires a debit to Rent Expense and a credit to Rent Payable.

Correct Answer: True
Explanation: When property or equipment is occupied or used during an accounting period but rent payment has not been made by period-end, an adjusting entry is required. Debiting Rent Expense recognizes the occupancy cost on the Income Statement for that timeframe. Crediting Rent Payable records the short-term legal obligation owed to the landlord on the Balance Sheet. This entry ensures full compliance with the expense recognition principle. (77 words)

Question 38

True or False: Collecting cash for previously accrued revenue increases current period net income.

Correct Answer: False
Explanation: When revenue is accrued at period-end, the income is recognized on the Income Statement immediately, and an asset (Accounts Receivable) is established. When cash is collected in a subsequent period, the entry debits Cash and credits Accounts Receivable. This transaction is purely an asset exchange on the Balance Sheet. Because the revenue was already counted in the period it was earned, collecting the cash has zero impact on current net income. (79 words)

Question 39

True or False: Accrued expense accounts are closed to Retained Earnings at the end of the fiscal year.

Correct Answer: False
Explanation: Accrued expense liability accounts (such as Salaries Payable or Interest Payable) are permanent (real) Balance Sheet accounts. Permanent accounts carry their ending balances forward into the next fiscal period and are never closed. Only temporary (nominal) accounts—specifically revenue, expense, and dividend accounts—are closed to Retained Earnings during year-end closing procedures. Mistaking liability payables for temporary expense accounts violates core general ledger mechanics. (75 words)

Question 40

True or False: The matching principle dictates that expenses must be reported in the same period as the revenues they helped generate.

Correct Answer: True
Explanation: The matching principle (also known as the expense recognition principle) is a primary foundation of accrual accounting. It requires businesses to report operating expenses in the exact same accounting period as the related revenues produced by those expenses. Accrual adjustments—such as accruing unpaid utility costs, employee wages, or sales commissions—are the precise mechanics used to ensure expenses are properly matched against income before statements are finalized. (76 words)

Question 41

True or False: Accrued revenues are classified as current liabilities on the Balance Sheet.

Correct Answer: False
Explanation: Accrued revenues represent earnings for completed services or delivered goods that have not yet been billed or collected. Because they represent enforceable claims to receive cash in the near future, accrued revenues are classified as Current Assets (such as Accounts Receivable or Accrued Interest Receivable) on the Balance Sheet. Current liabilities represent obligations owed to third parties, whereas accrued revenues represent economic resources owned by the firm. (76 words)

Question 42

True or False: Accruing employee wages at year-end increases both operating expenses and total liabilities.

Correct Answer: True
Explanation: When employees work during the final days of an accounting period but payment occurs in the next period, an adjusting entry is necessary. The entry debits Salaries Expense and credits Salaries Payable. The debit increases total operating expenses on the Income Statement, which reduces net income. The credit increases Salaries Payable under current liabilities on the Balance Sheet, ensuring both financial statements accurately reflect period-end operations. (76 words)

Question 43

True or False: Reversing entries are mandatory for all adjusting entries under IFRS.

Correct Answer: False
Explanation: Reversing entries are completely optional bookkeeping procedures under both IFRS and US GAAP. They are executed on the first day of a new accounting period solely to simplify administrative recordkeeping for routine cash payments or receipts later in the period. Whether a company utilizes reversing entries or not, the final reported numbers on the financial statements remain identical. They represent an accounting convenience rather than a regulatory requirement. (76 words)

Question 44

True or False: An omitted accrued revenue adjustment results in an overstatement of stockholders’ equity.

Correct Answer: False
Explanation: If accrued revenue is omitted at period-end, earned income is not recorded, causing total revenues and net income on the Income Statement to be understated. Because net income transfers directly into equity upon closing, Retained Earnings and total Stockholders’ Equity will also be understated—not overstated. Omission of accrued revenues understates both sides of the balance sheet by failing to recognize earned assets and income. (75 words)

Question 45

True or False: Paying an accrued liability reduces cash and reduces liabilities, leaving total expenses unchanged.

Correct Answer: True
Explanation: When an accrued liability (such as Interest Payable) is paid, the transaction involves debiting the liability account and crediting Cash. The expense was already recognized on the Income Statement in a prior period when the accrual entry was made. Therefore, settling the obligation decreases assets (Cash) and decreases liabilities on the Balance Sheet equally, without generating any new expense or altering current net income. (75 words)

Question 46

True or False: Accrual accounting is required for companies that issue public financial statements.

Correct Answer: True
Explanation: Regulatory frameworks such as US GAAP and IFRS strictly require the use of accrual accounting for all publicly traded companies and entities issuing audited financial statements. Cash-basis accounting is prohibited for public reporting because it fails to apply the matching and revenue recognition principles, creating distorted views of company profitability and asset liability structures that could mislead investors and creditors. (73 words)

Question 47

True or False: Accrued taxes payable are reported as long-term liabilities on the Balance Sheet.

Correct Answer: False
Explanation: Income taxes and property taxes accrued during the current operating period represent short-term debts owed to government authorities. Because tax settlements are typically required within a few months following the end of the fiscal year, Tax Payable is reported as a Current Liability on the Balance Sheet. Long-term liability status is reserved strictly for obligations due beyond one year or operating cycle. (73 words)

Question 48

True or False: Adjusting entries for accruals update accounting records for unrecorded economic events.

Correct Answer: True
Explanation: The primary objective of period-end accrual adjustments is to update ledger balances for economic activities—such as continuous interest, accrued wages, or completed services—that occurred during the period but were not entered into the routine bookkeeping journal because cash had not yet moved. Making these adjustments ensures that all assets, liabilities, revenues, and expenses are fully recognized before financial statements are published. (74 words)

Question 49

True or False: Accrued revenue requires a debit entry to a revenue account.

Correct Answer: False
Explanation: Revenue accounts increase with credit entries and decrease with debit entries. Recording accrued revenue requires crediting a revenue account (such as Service Revenue) to increase reported earnings on the Income Statement. The debit entry is applied to an asset account (such as Accounts Receivable) to recognize the claim to future cash. Debiting a revenue account would incorrectly reduce income rather than record newly earned revenue. (74 words)

Question 50

True or False: The Time Period Assumption requires businesses to make period-end adjusting entries for accruals.

Correct Answer: True
Explanation: The Time Period Assumption divides a business’s continuous life into artificial time intervals (months, quarters, years) for reporting purposes. Because business activities flow continuously across these boundaries, transactions are often partially completed at period-end. Accrual adjusting entries are necessary to assign the exact revenues earned and expenses consumed to their respective time periods, allowing stakeholders to evaluate performance consistently over discrete timeframes. (74 words)

Accruals Quiz: 50 True-or-False Questions with Answers and Explanations

Introduction

Accrual accounting recognizes assets, liabilities, income, and expenses in the reporting periods to which they relate, regardless of when cash is received or paid.[1] This principle allows financial statements to reflect the economic activity of a business more accurately than cash accounting alone. The followingAccruals Quiz contains 50 true-or-false statements for accounting students, bookkeeping learners, finance professionals, and anyone preparing for an accounting examination.

Read each statement carefully before checking the answer. The explanations are deliberately detailed so that the quiz can be used as both an assessment and a learning resource. Unless a question says otherwise, assume the entity uses the accrual basis and prepares monthly financial statements.

Answer: True.

Explanation: Accrual accounting focuses on the period in which an economic event occurs. For revenue, the accountant asks whether the company has earned income by satisfying the relevant obligation. For expenses, the accountant asks whether goods or services have been received or a present obligation has arisen. Cash timing is then considered separately as collection, payment, deferral, or settlement. This framework helps determine whether an accrual, deferral, receivable, payable, or adjustment is needed.