Question

On December 31, Year 1 Hilton Company recognized $600 of accrued salary expense. Hilton paid cash to the employees in Year 2. Which of the following shows how these events will affect Hilton’s accounting equation on December 31, Year 1?

Answer 1

Answer:

    Assets    Liabilities    Equity    Revenue        Expense       Net income

B. NA = 600 +   (600)     NA -     600 = (600)

Explanation:

By recognizing this transaction Hilton Company is creating a liability because it's being recognized in year 1 and the related payment is taking place in year 2, therefore until it's paid off it remains a liability for Hilton company.

Second impact would be on equity. Liability is either paid off from profits or retained earnings. Retained earnings are part of equity, a reduction in retained earnings will reduce equity. Since it's not being paid this year this means it's not being paid from profits, therefore when it will be paid in year 2 it might be paid from second years profits or from retained earnings, therefore the recognition of accrued salary would reduce equity.

It will have no impact on revenue because revenue comes before any expenses are recognized. Accrued salary increases the expense for the year hence reducing the net income because net income is calculated after expenses have been charged.