Question

Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday, December 31, what does the amount of wages earned during the first three days of the week (12/29, 12/30, 12/31) represent? Explain.

Short answer

It indicates a current liability and therefore, it must be listed in the term in which it has been incurred.

Step-by-step solution

Meaning of Balance Sheet

The balance sheet is defined as the statement that aims to determine the nature and amount of different assets and liabilities so that the financial position could clearly be known to all those concerned. Hence, the primary role of the balance sheet is to depict a fair picture of the business at a certain date.

Representation of the amount of the wages earned

The wages of the first three days of the week to be paid to employees on December 31 specify current liability. Expenses associated with it must be 'matched' to this period so as to properly indicate the expenses incurred.