Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Financial Accounting

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

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Multiple Choice

Which of the following best describes the adjusting journal entry required when a business recognizes prepaid expenses at the end of an accounting period?

Debit an expense account and credit a prepaid asset account

Debit a revenue account and credit a prepaid asset account

Debit a prepaid asset account and credit an expense account

Debit a liability account and credit a prepaid asset account

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Verified step by step guidance

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. At the end of the accounting period, an adjusting journal entry is required to recognize the portion of the prepaid expense that has been used or expired.

Identify the accounts involved: Prepaid expenses are initially recorded as assets because they represent future economic benefits. As the prepaid expense is consumed, it becomes an expense, which reduces the asset value.

Determine the adjusting journal entry: To adjust for the portion of the prepaid expense that has been used, you need to debit the expense account (to increase the expense) and credit the prepaid asset account (to decrease the asset). This reflects the consumption of the prepaid expense during the period.

Analyze the incorrect options: The other options provided involve debiting revenue, liability, or prepaid asset accounts, which do not align with the correct treatment of prepaid expenses. Revenue accounts are unrelated to prepaid expenses, and liabilities are not involved in this adjustment.

Apply the correct adjusting journal entry: The correct entry is 'Debit an expense account and credit a prepaid asset account,' as this properly reflects the consumption of the prepaid expense and adjusts the accounts accordingly.