Multiple Choice
Which of the following is the first step in the process of recording adjusting journal entries for prepaid expenses?
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
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Which of the following best describes the purpose of adjusting journal entries for prepaid expenses at the end of an accounting period?
A
To allocate the cost of prepaid expenses to the periods in which they are actually used or consumed.
B
To increase the balance of prepaid expense accounts to reflect future payments.
C
To record cash payments made for future expenses as current period expenses.
D
To reverse previously recorded expenses that have not yet been paid in cash.
Verified step by step guidance1
Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services that will be consumed in future accounting periods. Examples include prepaid rent, insurance, or subscriptions.
Recognize the purpose of adjusting entries: Adjusting journal entries are made at the end of an accounting period to ensure that revenues and expenses are recorded in the correct period, adhering to the accrual basis of accounting.
Focus on the specific purpose for prepaid expenses: The goal of adjusting entries for prepaid expenses is to allocate the cost of these expenses to the periods in which they are actually used or consumed, ensuring accurate representation of expenses in the financial statements.
Eliminate incorrect options: Review the provided options and identify which ones do not align with the purpose of adjusting entries for prepaid expenses. For example, increasing the balance of prepaid expense accounts or recording cash payments as current expenses are not correct purposes.
Select the correct answer: Based on the understanding of prepaid expenses and adjusting entries, choose the option that accurately describes the purpose, which is 'To allocate the cost of prepaid expenses to the periods in which they are actually used or consumed.'
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