How are salaries reflected on the income statement?

• A. Income
• B. Accruals
• C. Assets
• D. Expenses

Answer: (D)

Salaries are costs of labor and are shown as an expense on the income statement, not as income or an asset. Under accrual accounting, the expense is recognized in the period the employees earned their pay, with a corresponding liability if it hasn’t yet been paid. This expense reduces the company’s operating income (and ultimately net income). Depending on the nature of the work, salary costs can flow into different expense lines (for example, production labor into cost of goods sold or other salaries into operating expenses), but the key point is that they appear as an expense, not as income or an asset.