Which of the following statements is correct? Group of answer choices Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal. Profit will always be greater under the cash basis of accounting than under the accrual basis of accounting. Accrued revenues are revenues that have been received but not yet earned. Asset prepayments become expenses when they expire.
Question
Which of the following statements is correct? Group of answer choices
Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.
Profit will always be greater under the cash basis of accounting than under the accrual basis of accounting.
Accrued revenues are revenues that have been received but not yet earned.
Asset prepayments become expenses when they expire.
Solution
Let's evaluate each statement:
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Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal: This statement is incorrect. Even if the trial balance debit and credit columns are equal, adjusting entries may still be necessary to ensure that all revenues and expenses are recorded in the correct accounting period.
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Profit will always be greater under the cash basis of accounting than under the accrual basis of accounting: This statement is incorrect. The difference between cash and accrual accounting is the timing of when revenues and expenses are recognized. The cash basis recognizes revenue when cash is received and expenses when they are paid, while the accrual basis recognizes revenue when it is earned and expenses when they are incurred. The profit could be greater under either method, depending on the timing of cash flows.
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Accrued revenues are revenues that have been received but not yet earned: This statement is incorrect. Accrued revenues are revenues that have been earned but not yet received in cash or recorded.
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Asset prepayments become expenses when they expire: This statement is correct. Prepaid expenses are assets that represent future economic benefits. When these benefits are used or expire, the prepaid expense is recognized as an expense.
Therefore, the correct answer is: Asset prepayments become expenses when they expire.
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