Assume that a company obtains legal services from its lawyer, worth $1,000, but has not yet paid for those services when the accounting period ends. Under accrual accounting, the books should reflect

Question

Quizplus · Accepted Answer

According to accrual accounting, expenses are recognized when they are incurred, not when they are paid. Therefore, the company should record a liability of $1,000 (since they owe the lawyer for the services provided) and an expense of $1,000 (since the company received the benefit of the legal services). Option A is incorrect because revenue would only be recognized if the company had invoiced the client and the client had agreed to pay. Option B is incorrect because revenue should not be recognized in this situation. Option C is incorrect because although the lawyer has not been paid yet, the company still owes the money and therefore there is a liability.

Assume That a Company Obtains Legal Services from Its Lawyer