When preparing the master budget, which of the following best describes the role of budgeting assumptions regarding prepaid expenses?

• A. Budgeting assumptions are only used for cash receipts and do not affect prepaid expenses.
• B. Budgeting assumptions require that all prepaid expenses be expensed immediately when paid.
• C. Budgeting assumptions eliminate the need for adjusting journal entries related to prepaid expenses.
• D. Budgeting assumptions help estimate the timing and amount of prepaid expenses to ensure accurate expense recognition in each period.

Answer: (D)

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 in future periods. These are recorded as assets initially and expensed over time as the benefit is realized.
2. Recognize the role of budgeting assumptions: Budgeting assumptions are estimates or predictions used to forecast financial activities, including the timing and amount of prepaid expenses. These assumptions help ensure that expenses are recognized accurately in the appropriate accounting periods.
3. Identify how prepaid expenses are treated in the master budget: Prepaid expenses are included in the budget to allocate costs to the correct periods. Budgeting assumptions guide the estimation of these expenses, ensuring they align with the expected consumption or benefit period.
4. Clarify why budgeting assumptions do not eliminate adjusting journal entries: Adjusting journal entries are still required to account for the actual usage of prepaid expenses and to ensure compliance with the accrual basis of accounting. Budgeting assumptions provide estimates but do not replace the need for adjustments based on actual data.
5. Conclude the importance of budgeting assumptions: Budgeting assumptions regarding prepaid expenses are essential for accurate financial planning and expense recognition. They help estimate the timing and amount of these expenses, ensuring the master budget reflects realistic and reliable financial projections.