The adjustment for prepaid expenses:

Question

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The adjustment for prepaid expenses illustrates the application of the expense recognition principle, which requires that expenses be recognized in the period in which the related revenue is recognized. This adjustment is necessary when a company has paid for an expense in advance and needs to allocate the cost over the periods benefited. It typically involves a transfer from Prepaid Expense (an asset) to the corresponding Expense account (such as Rent Expense or Insurance Expense). This adjustment does not record a liability, nor does it directly affect stockholders' equity.

The Adjustment for Prepaid Expenses