Assuming prepaid expenses are originally recorded in balance sheet accounts, the adjusting entry to record use of a prepaid expense is:
A) Increase an expense; decrease a liability.
B) Increase an expense; decrease an asset.
C) Increase an asset; increase revenue.
D) Increase an expense; increase a liability.
E) Decrease a liability; increase revenue.

Question

Quizplus · Accepted Answer

Prepaid expenses are assets that have been paid for in advance but have not yet been consumed. When recording the use of a prepaid expense, it means that the asset has been consumed and therefore needs to be expensed. This requires an increase in an expense account (such as rent expense or insurance expense) and a decrease in the asset account (prepaid rent or prepaid insurance), which is an example of choice B.

Assuming Prepaid Expenses Are Originally Recorded in Balance Sheet Accounts