If Jenny’s Bakery purchased an insurance policy, assuming the accrual accounting method is still being used, when would the company report the cost of the policy as an expense?
Explanation
Answer - C - The Company would report the cost of the policy as an expense when the benefits of the policy are received. In accrual accounting, revenue and expenses are recognized during the accounting period in which the benefit or expense occurs, rather than when payment is made or received.
Key Takeaway: Accrual accounting recognizes revenue when it is earned and expenses when they are incurred, as opposed to cash accounting, which would recognize revenue when payment is received and expenses when payment is made. Accrual accounting is considered to be the standard accounting practice for most companies, with the exception of very small operations. This method provides a more accurate picture of the company's current condition, but its complexity makes it more expensive to implement.
