When a prepaid expense is initially debited to an expense account expenses and assets are both overstated prior to adjustment.

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When a prepaid expense is initially recorded, it is debited to a prepaid expense account (an asset account), not an expense account, so only assets are affected by the initial transaction. Expenses are not overstated until the portion of the prepaid expense is recognized as an expense over time.

When a Prepaid Expense Is Initially Debited to an Expense