What is the adjusting entry for a prepaid expense at period end?

What is the adjusting entry for a prepaid expense at period end?

• A. Debit Expense; Credit Prepaid Asset; adjust to recognize the portion consumed during the period.
• B. Debit Prepaid Asset; Credit Expense.
• C. Debit Asset; Credit Revenue.
• D. Debit Revenue; Credit Expense.

Answer: (A)

Adjusting a prepaid expense at period end is about recognizing the portion that has been used. Prepaid expenses are assets because they represent future benefits. As those benefits are consumed, you move the cost from the asset to an expense. So the proper adjusting entry is to debit the expense (to record the cost incurred this period) and credit the prepaid asset (to reduce the asset balance for the portion used). This matches the period’s actual consumption and keeps both the income statement and balance sheet accurate. Debiting the prepaid asset and crediting the expense would do the opposite, increasing the asset instead of recognizing the expense. Entries that involve revenue in this context aren’t appropriate for acknowledging the use of a prepaid asset, since no revenue is earned from the consumption of a prepaid item.

Adjusting a prepaid expense at period end is about recognizing the portion that has been used. Prepaid expenses are assets because they represent future benefits. As those benefits are consumed, you move the cost from the asset to an expense. So the proper adjusting entry is to debit the expense (to record the cost incurred this period) and credit the prepaid asset (to reduce the asset balance for the portion used). This matches the period’s actual consumption and keeps both the income statement and balance sheet accurate.

Debiting the prepaid asset and crediting the expense would do the opposite, increasing the asset instead of recognizing the expense. Entries that involve revenue in this context aren’t appropriate for acknowledging the use of a prepaid asset, since no revenue is earned from the consumption of a prepaid item.