Assume a company has borrowed money from a bank. As of the end of December 31, one month's interest has built up on this loan, and has not been paid yet. Under accrual accounting, the company should make which of the following adjustments, if any, to its records?
A) It should record a decrease in assets, an increase in expenses, and a decrease in equity.
B) It should record an increase in assets, an increase in expenses, and a decrease in equity.
C) It should record a decrease in liabilities, an increase in expenses, and a decrease in equity.
D) It should record an increase in liabilities, an increase in expenses, and a decrease in equity.
E) No adjustment is needed since the interest has not yet been paid to the bank.

Question

Quizplus · Accepted Answer

Under accrual accounting, the company should recognize the interest that has accrued but not yet been paid as an expense and increase the liability for the interest owed to the bank. This means that the company should record an increase in liabilities, an increase in expenses, and a decrease in equity. Therefore, option D is the correct choice.

Assume a Company Has Borrowed Money from a Bank