Smith signed a contract with a service provider for security services at a rate of $250 per month for the period of January through June. He will pay the service provider the entire amount at the end of June. Smith makes adjusting entries each month. During the month of June, Smith should have recorded total security expense of $500.

Question

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Smith should have recorded a total security expense of $1,500 ($250 per month for 6 months) by the end of June. If he only recorded $500 in June, he did not properly adjust his expenses for the prior months, resulting in an understatement of expenses.

Smith Signed a Contract with a Service Provider for Security