Which of the following reflects the balances of prepayment accounts prior to adjustment?
A) Balance sheet accounts are understated and income statement accounts are understated.
B) Balance sheet accounts are overstated and income statement accounts are overstated.
C) Balance sheet accounts are overstated and income statement accounts are understated.
D) Balance sheet accounts are understated and income statement accounts are overstated.

Question

Quizplus · Accepted Answer

Before adjustments, prepayment accounts (prepaid expenses) are assets on the balance sheet that are initially recorded when paid for. This results in an overstatement of assets (balance sheet accounts) because the expense has not yet been recognized. Income statement accounts (expenses) are understated because the expense has not been recorded in the period it relates to, but will be recognized as the benefit of the prepayment is received or the service is consumed.

Which of the Following Reflects the Balances of Prepayment Accounts