In its first year of operations, Jetway Airlines incurred and paid Salaries Expense of $40 million. On December 31, it accrued an additional Salaries Expense of $2 million. What should Jetway report in the income statement and balance sheet for its first year ended December 31?

Income statement :

Salaries Expense (40+2)                                $42 million

Balance sheets:

Accrued Salaries                                           $2  million

Explanation:

According to the matching concept revenue earned for a particular accounting period should be reported (in the income statement) alongside all the expenses incurred to generate them.

Sometimes, some expenses for which value and benefit had been received would remain unpaid. So the accrual concepts states that such expenses should be recognised as liabilities in the balance sheet.

Apply these two concepts to Jetway Airlines

On December 31st,

Income statement

Salaries Expense (40+2)                                $42 million

Balance sheets

Accrued Salaries                                           $2  million

In the income statement is must report a salaries expense of $42 million.

In the balance sheet is must report a liability - salaries payable of $42 million.

Explanation:

The company actually incurred in $42 million in salaries expenses, so they should be included in the balance sheet. Since the company only paid $40 million in salaries, it still owes $2 million. So it must report that amount as a current liability.

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