State BPA Fundamental Accounting Practice Exam

What entry would typically be made to reflect a prior year’s expenses in the current year?

1. Debit Retained Earnings

2. Debit Accounts Receivable

3. Debit Expense Account

4. Credit Income Summary

The correct answer is: Debit Expense Account

To reflect a prior year’s expenses in the current year, the appropriate entry is to debit an expense account. This is because expenses that were incurred in a previous accounting period but were not recognized until the current period need to be recorded to maintain accurate financial statements. By debiting the expense account, the company acknowledges the expense in the current year’s financial records, ensuring that the income statement reflects the true economic activity of the business during that period. This action is crucial for maintaining proper accounting principles, such as the matching principle, which dictates that expenses should be matched with the revenues they help generate within the same period. Therefore, recognizing prior year’s expenses in the current year aligns with providing a fair representation of the company’s financial performance, even if the actual cash outflow occurred in a different period. Recording the expense in the current year also affects the retained earnings when closing the books at the end of the accounting period. While this entry does not directly adjust retained earnings at the time of the expense recognition, it ultimately will impact, as reported net income is reduced when expenses are recognized.