Classifying Accruals and Prepayments as Assets or Liabilities

Steps:

• Identify accrued revenue: Revenue earned but unpaid by period-end, treated as a receivable.
• Classify accrued revenue: Recorded as a current asset on the balance sheet.
• Identify prepaid expenses: Payments made for future periods, representing future economic benefits.
• Classify prepaid expenses: Recorded as a current asset, not a liability.

Why A is correct:

• Accrued revenue is a current asset per the accrual basis of accounting (revenue recognized when earned), and prepaid expenses are a current asset (advance payment for services/goods to be received).

Why the others are wrong:

• B pairs 1 (correct) with 4 (incorrect; prepaid expenses are assets, not liabilities).
• C pairs 3 (correct) with 2 (incorrect; prepaid expenses are assets, not liabilities).
• D pairs two incorrect statements (both treat prepaid expenses as liabilities).

Final answer: A