Future Business Leaders of America (FBLA) Agribusiness Practice Test

What does accrued taxes refer to?

1. Taxes that have been paid in advance

2. Taxes built up over time

3. Current tax liabilities

4. Taxes that are exempted

The correct answer is: Taxes built up over time

Accrued taxes refer specifically to the taxes that have built up over time and are owed but not yet paid. This concept is essential within accounting and finance, as it reflects a company’s current financial obligations related to tax liabilities that are due in a future period. When businesses prepare their financial statements, they must account for these accrued taxes to accurately present their financial position. The notion of accrued taxes captures instances where expenses have been recognized in the accounting period but the corresponding tax payments haven't been made yet. This could include income taxes, property taxes, or any other local, state, or federal taxes that accumulate over time. In contrast, options like taxes paid in advance refer to prepaid taxes, which do not align with the concept of accrual. Current tax liabilities would focus on taxes that are due in the immediate near term, rather than reflecting what has been accumulated over time. Lastly, taxes that are exempted are entirely separate, as they do not relate to the concept of accrued obligations. Understanding these distinctions reinforces the importance of accurately tracking accrued expenses to ensure proper financial reporting and compliance.