After a $10 increase in accrued compensation, what are the balance sheet effects?

• A. Cash up $6; Liabilities up $14
• B. Cash up $4; Liabilities up $10
• C. Cash down $4; Liabilities down $10
• D. Cash up $10; Liabilities up $0

Answer: (B)

Accrued compensation represents wages earned by employees that haven’t been paid yet. When you record this accrual, you increase a liability (accrued wages payable) and you record an expense on the income statement, but cash does not move at the time of accrual. So the balance sheet effect is that current liabilities rise by the amount of the accrual, and cash stays the same.

In this case, the accrual increases liabilities by 10 and leaves cash unchanged. The option that reflects the liability increase is the one stating liabilities up by 10, with no cash movement at the accrual moment.