How is a prepaid expense initially recorded, and how is it adjusted over time?

How is a prepaid expense initially recorded, and how is it adjusted over time?

• A. Debit Prepaid Expense; Credit Cash. Over time, Debit Expense and Credit Prepaid Expense for the portion used.
• B. Debit Cash; Credit Prepaid Expense. Over time, Debit Prepaid Expense and Credit Revenue for the portion used.
• C. Debit Expense; Credit Cash. Over time, Debit Revenue and Credit Expense for the portion used.
• D. Debit Accounts Receivable; Credit Prepaid Expense. Over time, Debit Supplies Expense and Credit Prepaid Expense.

Answer: (A)

Prepaid expenses are payments made in advance for goods or services you will receive later, so they start as an asset. When you make the payment, you record it by debiting Prepaid Expense (increasing the asset) and crediting Cash (or Accounts Payable if not paid right away). As time passes and you actually use the benefit, you recognize the cost by debiting the appropriate Expense account and crediting Prepaid Expense for the portion consumed. This reduces the asset on the balance sheet and increases expenses on the income statement in the period the service or good is used. The other options mix up the accounts (treating the payment as Cash outflow or Revenue, or using Accounts Receivable) and don’t reflect how a prepaid asset turns into an expense over time.

Prepaid expenses are payments made in advance for goods or services you will receive later, so they start as an asset. When you make the payment, you record it by debiting Prepaid Expense (increasing the asset) and crediting Cash (or Accounts Payable if not paid right away). As time passes and you actually use the benefit, you recognize the cost by debiting the appropriate Expense account and crediting Prepaid Expense for the portion consumed. This reduces the asset on the balance sheet and increases expenses on the income statement in the period the service or good is used. The other options mix up the accounts (treating the payment as Cash outflow or Revenue, or using Accounts Receivable) and don’t reflect how a prepaid asset turns into an expense over time.