• Explanation

Accrual accounting uses the matching principle to recognize a cost as an expense in the same period as the benefit (usually a revenue). Expenses incurred in the current period and paid in a future period are recorded as a liability in the balance sheet until paid. Accrued liabilities equal current period expenses minus any payments made.

Dash Co. has incurred a $15,000 utility expense for the period ending June 30.

Dash paid $5,000 of the expense on June 1, leaving a balance of $10,000 (ie, $15,000 − $5,000) as the accrued liability in the June 30 balance sheet.

(Choice A) $6,000 is the utility invoice for May 16–June 15, which ignores the remaining $4,000 expense for June.

(Choices B and D) $14,000 is the total of the May 16–July 15 utility bills. The accrued liability balance at June 30 includes only the amounts incurred and not yet paid through the period ending June 30. $7,000 is half of this incorrect amount.

Things to remember:
The matching principle states that revenues and any related expenses must be recognized together in the same period. Liabilities are expenses incurred in the current period that will be paid in a future period. Expenses should match the exact time frame reported on the financial statement.

Lecture References :

• FAR 12.01 : Liabilities: Current Liabilities