What is the effect on net income when accrued compensation increases by $10?

When accrued compensation increases by $10, it represents an expense that the company has incurred but has not yet paid. In accounting, expenses reduce net income, so recognizing an increase in accrued compensation directly affects the net income by decreasing it.

Specifically, when an expense such as accrued compensation increases, it will be recorded on the income statement. This recognition of expense will result in a decrease in net income by the full amount of the increase, which in this case is $10.

Therefore, net income will decrease by $10, aligning with the principles of accrual accounting, where expenses are recognized when they are incurred, not when they are paid. This leads to a clearer picture of the company’s obligations and financial performance during the accounting period.