Which of the following best describes the primary question accountants ask when preparing adjusting journal entries for prepaid expenses at the end of an accounting period?

• A. How much of the prepaid expense has been used or expired during the period?
• B. What is the total cash paid for all expenses during the period?
• C. How much revenue has been earned but not yet received in cash?
• D. What is the balance of accounts payable at the end of the period?

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 or used in future periods. Examples include prepaid rent, insurance, or subscriptions.
2. Recognize the purpose of adjusting journal entries: Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are recorded in the period they are incurred, following the accrual basis of accounting.
3. Identify the specific question related to prepaid expenses: The primary question accountants ask is how much of the prepaid expense has been used or expired during the period. This helps allocate the expense to the correct accounting period.
4. Determine the adjustment process: To adjust for prepaid expenses, calculate the portion of the prepaid amount that has been used or expired during the period. This amount is then recorded as an expense, while the remaining balance stays as an asset.
5. Prepare the adjusting journal entry: Debit the appropriate expense account to reflect the expired portion and credit the prepaid expense account to reduce the asset balance. This ensures accurate financial reporting.