Which of the following is NOT a true statement regarding adjusting journal entries for prepaid expenses?

• A. No adjusting entry is needed for prepaid expenses at the end of the accounting period.
• B. Prepaid expenses are initially recorded as assets on the balance sheet.
• C. Adjusting entries for prepaid expenses decrease assets and increase expenses.
• D. Adjusting entries ensure that expenses are recognized in the period in which they are incurred.

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 to be received in the future. Initially, they are recorded as assets because they represent future economic benefits.
2. Review the purpose of adjusting journal entries: Adjusting entries are made at the end of the accounting period to ensure that revenues and expenses are recognized in the correct period, following the accrual basis of accounting.
3. Analyze the treatment of prepaid expenses: Adjusting entries for prepaid expenses involve decreasing the asset account (e.g., Prepaid Rent or Prepaid Insurance) and increasing the expense account (e.g., Rent Expense or Insurance Expense) to reflect the portion of the prepaid expense that has been used during the period.
4. Evaluate the statement 'No adjusting entry is needed for prepaid expenses at the end of the accounting period': This statement is incorrect because adjusting entries are necessary to allocate the expense to the correct period and ensure accurate financial reporting.
5. Conclude that the correct answer is the statement 'No adjusting entry is needed for prepaid expenses at the end of the accounting period,' as it contradicts the fundamental principles of accrual accounting and proper expense recognition.