Cengage Accounting Exam 1 Practice Test

Property tax owed to be paid beginning of next year is classified as which of the following?

Accrued expense Prepaid expense Unearned revenue Accrued revenue

Correct Answer:

Accrued expense

Explanation:

In accrual accounting, expenses are recorded when they are incurred, not when payment is made. If the property tax is incurred in the current period but won’t be paid until the beginning of next year, it creates an accrued expense—a current liability reflecting the obligation to pay for a cost that has already been recognized. You would record the expense now and set up a liability (property tax payable) to be settled later. This isn’t a prepaid expense, because you haven’t paid in advance for future benefits. It isn’t unearned revenue, since there’s no cash received for goods or services yet to be provided. It isn’t accrued revenue, since there is no revenue being recognized. So the correct classification is an accrued expense.

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