Which of the following best describes the purpose of adjusting journal entries for prepaid expenses at the end of an accounting period?

• A. To allocate the portion of prepaid expenses that has been used up during the period to expense accounts.
• B. To reverse previously recorded expense transactions.
• C. To record the initial payment of cash for future expenses.
• D. To increase the balance of prepaid expense accounts for future periods.

Answer: (A)

Verified step by step guidance

1. Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services that will be consumed or used in future accounting periods. Examples include prepaid rent, insurance, or subscriptions.
2. Recognize the purpose of adjusting entries: Adjusting journal entries are made at the end of an accounting period to ensure that revenues and expenses are recognized in the correct period, following the accrual basis of accounting.
3. Identify the specific purpose for prepaid expenses: For prepaid expenses, the adjustment is made to allocate the portion of the prepaid amount that has been used or expired during the accounting period to the appropriate expense account.
4. Determine the impact of the adjustment: The adjusting entry decreases the prepaid expense account (an asset account) and increases the related expense account to reflect the consumption of the prepaid asset.
5. Review the options provided: The correct answer aligns with the purpose of adjusting entries for prepaid expenses, which is 'To allocate the portion of prepaid expenses that has been used up during the period to expense accounts.'