Which of the following is the first step in the process of recording adjusting journal entries for prepaid expenses?

• A. Record the payment of the prepaid expense as an expense.
• B. Determine the amount of the prepaid expense that has been used up during the period.
• C. Prepare the financial statements.
• D. Close the temporary accounts.

Answer: (B)

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 periods. These are initially recorded as assets because they represent future economic benefits.
2. Identify the need for adjusting entries: Adjusting entries are required to ensure that the financial statements reflect the correct amount of expenses incurred during the period and the remaining balance of the prepaid asset.
3. Determine the amount of the prepaid expense used: Calculate the portion of the prepaid expense that has been consumed or used during the accounting period. This is the amount that needs to be transferred from the asset account to the expense account.
4. Record the adjusting journal entry: Debit the appropriate expense account to recognize the expense incurred and credit the prepaid asset account to reduce its balance, reflecting the portion that has been used.
5. Verify the adjustment: Ensure that the adjusting entry aligns with the matching principle, which states that expenses should be recognized in the same period as the revenues they help generate.