What is the best place to begin when identifying accounts that need adjusting journal entries for prepaid expenses?

• A. The statement of cash flows
• B. The post-closing trial balance
• C. The unadjusted trial balance
• D. The bank reconciliation statement

Answer: (C)

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 received in the future. These are recorded as assets initially and need adjusting entries to allocate the expense over the appropriate accounting periods.
2. Recognize the purpose of adjusting journal entries: Adjusting entries ensure that revenues and expenses are recorded in the correct accounting period, adhering to the accrual basis of accounting. For prepaid expenses, this involves transferring the appropriate portion from the asset account to an expense account.
3. Identify the role of the unadjusted trial balance: The unadjusted trial balance lists all accounts and their balances before any adjustments are made. It is the starting point for identifying accounts that require adjustments, including prepaid expenses.
4. Locate prepaid expense accounts in the unadjusted trial balance: Review the unadjusted trial balance to find accounts labeled as 'Prepaid Insurance,' 'Prepaid Rent,' or similar. These accounts typically require adjustments to reflect the portion of the expense that has been incurred during the period.
5. Determine the adjustment amount: Calculate the portion of the prepaid expense that has been used or incurred during the accounting period. This amount will be transferred from the prepaid asset account to the corresponding expense account through an adjusting journal entry.