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Adjustments for previously recorded prepaid expenses Decrease assets and increase revenues Decrease expenses and increase assets...

  1. Adjustments for previously recorded prepaid expenses
  1. Decrease assets and increase revenues
  2. Decrease expenses and increase assets
  3. Decrease assets and increase expenses
  4. Increase expenses and increase owner’s equity
  5. Increase revenues and Decrease assets.

Why is C the correct answer?

Business   Accounting   
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Homework Answers

Answer #1

So, let me explain this with an example.

Company paid rent in advance for 3 months, the amount being $300 ($100 per month) on November 1.

We know that prepaid rent is an asset.

The accounts are closed on December 31. So, as per accrual principle, we have to expense the rent for November and December. Rent for two months = 100 * 2 = 200

So, the entry would be

Rent expense..... Debit $200

Prepaid rent..... Credit $200

.

The balance in prepaid rent will be only $100 (asset decreased)

We recognized rent for two months (expense account increased)

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