Distinguish between accrued expenses and prepaid expenses: which statement is true?

• A. Accrued expenses are obligations recognized before payment; prepaid expenses are payments made before benefit is received.
• B. Accrued expenses are payments made before benefit is received.
• C. Prepaid expenses are obligations recognized before payment.
• D. Accrued expenses are revenue items.

Answer: (C)

The key idea is how timing affects recognition of expenses. Accrued expenses are obligations that a company has incurred for goods or services already received but not yet paid for, so they show up as a liability before cash changes hands. Prepaid expenses happen when a payment is made in advance for goods or services that will be received later; they are recorded as an asset (a prepaid expense) and expensed over time as the benefit is realized. So the true description is that accrued expenses are obligations recognized before payment, while prepaid expenses are payments made before the benefit is received.