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Hi Sir
I got this question from Kaplan Exam kit..
Which of the following statement is not true?
a- Accrual decrease profit
b- Accrued income decrease profit
c- a prepayment is an asset
d- an accrual is a liabilityThe correct answer is B,
in my view though its an accrual it won’t have any effect on profit because of accrual concept. So I agree option B is a false statement.
my question is why option A is true
If you accrue for an expense, then the total expense is higher and therefore the profit will be lower.
I’d call this a bad question, as the term “accrual” implies something that is still owing. Accrues expenses would actually mean that we have an expense which is unpaid, therefore increasing the expense, and rising a liability. On the other hand, accrued income would increase the income account (let’s say something like a non-operating income), as well as an asset (essentially a debtor), therefore increasing profit.
Therefore B is always FALSE, as it increases income. B might be true (if “accrual is read as accrued income) or false (if an expense)
(I find some question banks are far too ambiguous)
A & B are read as opposites, although they can be read as identical.
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