When should a company record an adjusting journal entry for prepaid expenses?

• A. At the end of the accounting period, as the prepaid expense is used up
• B. Only when cash is received from customers
• C. At the beginning of the next fiscal year
• D. When the prepaid expense is initially paid

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 used in the future. 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 correct period, following the accrual basis of accounting.
3. Identify when prepaid expenses are recorded: When a company initially pays for a prepaid expense, it is recorded as an asset because the benefit of the payment will be realized in future periods.
4. Determine when to adjust for prepaid expenses: At the end of the accounting period, the portion of the prepaid expense that has been used up or expired is transferred from the asset account to an expense account. This ensures that the expense is recognized in the correct period.
5. Conclude the correct timing: The adjusting journal entry for prepaid expenses should be recorded at the end of the accounting period, as the prepaid expense is used up, to comply with the matching principle in accounting.