Which of the following best describes the adjusting journal entry required when a business recognizes prepaid expenses at the end of an accounting period?

• A. Debit an expense account and credit a prepaid asset account
• B. Debit a revenue account and credit a prepaid asset account
• C. Debit a prepaid asset account and credit an expense account
• D. Debit a liability account and credit a prepaid asset account

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 that will be consumed in future accounting periods. At the end of the accounting period, an adjusting journal entry is required to recognize the portion of the prepaid expense that has been used or expired.
2. Identify the accounts involved: Prepaid expenses are initially recorded as assets because they represent future economic benefits. As the prepaid expense is consumed, it becomes an expense, which reduces the asset value.
3. Determine the adjusting journal entry: To adjust for the portion of the prepaid expense that has been used, you need to debit the expense account (to increase the expense) and credit the prepaid asset account (to decrease the asset). This reflects the consumption of the prepaid expense during the period.
4. Analyze the incorrect options: The other options provided involve debiting revenue, liability, or prepaid asset accounts, which do not align with the correct treatment of prepaid expenses. Revenue accounts are unrelated to prepaid expenses, and liabilities are not involved in this adjustment.
5. Apply the correct adjusting journal entry: The correct entry is 'Debit an expense account and credit a prepaid asset account,' as this properly reflects the consumption of the prepaid expense and adjusts the accounts accordingly.