2. When recording adjusting journal entries for prepaid expenses at the end of an accounting period, which of the following is the correct adjustment?

• 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 liability account and credit an expense account
• D. Debit a prepaid asset account and credit an expense 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 adjustment is required to recognize the portion of the prepaid expense that has been used or expired.
2. Identify the accounts involved: Prepaid expenses are recorded as assets when initially paid. As the prepaid expense is consumed, it becomes an expense. Therefore, the adjustment involves reducing the prepaid asset account and increasing the expense account.
3. Determine the correct journal entry: To adjust for the portion of the prepaid expense that has been used, you need to debit the expense account (to increase it) and credit the prepaid asset account (to decrease it). This reflects the consumption of the prepaid asset.
4. Eliminate incorrect options: The other options provided involve debiting a revenue account, debiting a liability account, or debiting the prepaid asset account, none of which correctly reflect the adjustment for prepaid expenses. The correct adjustment is to debit an expense account and credit a prepaid asset account.
5. Apply the adjustment: Record the adjusting journal entry in the accounting records at the end of the period. For example, if \$500 of prepaid insurance has expired, the journal entry would be: Debit Insurance Expense \$500, Credit Prepaid Insurance \$500.