Which of the following is an important step when recording adjusting journal entries for prepaid expenses at the end of an accounting period?

• A. Recording the entire prepaid amount as an expense immediately upon payment.
• B. Ignoring prepaid expenses until the end of the fiscal year.
• C. Transferring prepaid expenses directly to revenue accounts.
• D. Recognizing the portion of the prepaid expense that has been used up as an expense.

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 or used in future accounting periods. Examples include prepaid rent, insurance, or subscriptions.
2. Identify the portion of the prepaid expense that has been used up during the accounting period: This involves determining how much of the prepaid amount has been consumed or expired based on the passage of time or usage.
3. Record the adjusting journal entry: Debit the appropriate expense account (e.g., Rent Expense, Insurance Expense) to recognize the portion of the prepaid expense that has been used up. This reflects the expense incurred during the period.
4. Credit the prepaid expense account: Reduce the prepaid expense account (e.g., Prepaid Rent, Prepaid Insurance) by the same amount to reflect the decrease in the asset due to its usage.
5. Ensure the adjusting entry aligns with the accrual basis of accounting: This step ensures that expenses are recognized in the period they are incurred, regardless of when the payment was made, adhering to the matching principle.