Which of the following is the primary goal of making adjusting journal entries for prepaid expenses at the end of an accounting period?

• A. To record cash payments made during the period
• B. To increase the total assets reported on the balance sheet
• C. To recognize revenue before it is earned
• D. To match expenses with the revenues they help to generate in the same 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 or used in future periods. Examples include prepaid rent, insurance, or subscriptions.
2. Learn the purpose of adjusting journal entries: Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are recognized in the period they are incurred, following the accrual basis of accounting.
3. Focus on the matching principle: The matching principle in accounting states that expenses should be recognized in the same period as the revenues they help to generate. This ensures accurate representation of financial performance.
4. Identify the impact of prepaid expenses: When prepaid expenses are initially recorded, they are treated as assets because they represent future economic benefits. Adjusting entries are required to allocate the portion of the prepaid expense that has been used or expired during the period.
5. Prepare the adjusting journal entry: To adjust for prepaid expenses, debit the appropriate expense account (e.g., Rent Expense) to recognize the expense incurred, and credit the prepaid expense account (e.g., Prepaid Rent) to reduce the asset balance. This aligns the expense with the revenue generated in the same period.