BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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liability accounts.
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revenue accounts.
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prepaid expense adjusting entries.
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accrued expense adjusting entries.
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Detailed explanation-1: -An asset-expense account relationship exists with prepaid expenses.
Detailed explanation-2: -Prepaid expenses are considered a current asset because they are expected to be consumed, used, or exhausted through standard business operations with one year. As the benefits of the prepaid expense are realized, it is recognized on the income statement.
Detailed explanation-3: -The adjusting journal entry for a prepaid expense, however, does affect both a company’s income statement and balance sheet. Refer to the first example of prepaid rent. The adjusting entry on January 31 would result in an expense of $10, 000 (rent expense) and a decrease in assets of $10, 000 (prepaid rent).
Detailed explanation-4: -Why are prepaid expenses considered assets? Prepaid expenses are recorded as an asset on a business’s balance sheet because they signify a future benefit that is due to the company. Prepaid expenses are amounts paid in advance by a business in exchange for goods or services to be delivered in the future.