Immediately after a business pays an amount for a future service, with no part of the service yet received, what is the usual effect on total assets?
Correct answer: C. Total assets remain unchanged
- A. Total assets increase
- B. Total assets decrease
- C. Total assets remain unchanged
- D. Total assets become liabilities
Explanation
The payment changes cash into a prepaid asset of equal value. Therefore, total assets do not change at that moment, although their composition changes.
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About Accruals, Prepayments and Provisions
Accruals and prepayments adjust income and expenses to the accounting period in which they are earned or incurred, following the matching principle. Provisions recognise expected obligations or losses when their amount or timing is uncertain, which distinguishes them from ordinary accruals and from general reserves.
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