If a company records prepayment of expenses in an asset account, the adjusting entry would:
A) Result in a debit to an expense and a credit to an asset account.
B) Cause an adjustment to prior expense to be overstated and assets to be understated.
C) Cause an accrued liability account to exist.
D) Result in a debit to a liability and a credit to an asset account.
E) Decrease cash.

Question

Quizplus · Accepted Answer

Prepaid expenses are initially recorded as assets because the company has paid for a future benefit. However, since the benefit will be consumed over time, the asset account should be reduced and the expense account should be increased. Therefore, the adjusting entry will be a debit to an expense account and a credit to an asset account.

If a Company Records Prepayment of Expenses in an Asset