When a ﬁrm has wages earned but not yet paid at the end of a ﬁnancial reporting period, what must it do to recognize the liabilities and expenses?
A) It must credit the asset accounts for the appropriate payroll amounts.
B) It must create an adjusting entry to recognize the payroll accrual.
C) It must pay its employees for the wages earned as of that date.
D) It must wait until the next ﬁnancial period to record the payroll data.

Question

Quizplus · Accepted Answer

The firm must create an adjusting entry to recognize the payroll accrual. This means that it needs to recognize the expenses and liabilities associated with the wages earned but not paid at the end of the financial reporting period. This adjusting entry will increase the expense account and create a corresponding liability on the balance sheet.

When a ﬁRm Has Wages Earned but Not Yet Paid