What happens to liabilities when accrued expenses are recognized?

When accrued expenses are recognized, liabilities increase as expenses are incurred because these expenses represent obligations that the company has not yet paid but must honor in the future. Accrued expenses reflect amounts owed for services or goods received that have not yet been paid for by the end of the accounting period.

For instance, if a company has received services (like utilities or wages) but hasn't yet paid for them, it records an accrued expense, thereby increasing its liabilities on the balance sheet. This adjustment ensures that the matching principle in accounting is followed, as it allows expenses to be matched with the revenues they helped generate, providing a more accurate financial picture of the company's operations in that accounting period.

In contrast, the other options would not accurately describe the consequences of recognizing accrued expenses. Payments made would actually reduce liabilities rather than increase them, unchanged liabilities would not reflect the recognition of new obligations, and converting liabilities into assets does not occur in this context. Therefore, the correct understanding is that liabilities increase when accrued expenses are recognized.