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What transactions change accrual basis earnings?

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6. Which of these will result in a decrease in earnings during the period?
a. Pay landlord $15,000 for this month's rent.
b. Pay employees $15,000 for last month's work.
c. Complete work for customers who paid you last month.
d. Receive $15,000 from customers for next month's shipment.

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Solution Summary

Students often struggle with how transactions impact the accounts and earnings of a business. This question helps them to tease apart cash versus accrual and how accounts, especially unearned revenue, work.

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Answer: A

Reasoning behind answer:

Response a: If you pay a landlord for this month's rent, the entry is:

debit: Rent Expense
credit: Cash

Since increasing rent expense lowers earnings, this is correct.

Response b: If you pay ...

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