The adjustment to be made for prepaid expenses is____________?
Correct answer: B. Deduct prepaid expenses from respective expenses and show it as an asset
- A. Add prepaid expenses to respective expenses and show it as an asset
- B. Deduct prepaid expenses from respective expenses and show it as an asset
- C. Add prepaid expenses to respective expenses and show it as a liability
- D. Deduct prepaid expenses from respective expenses and show it as a liability
Explanation
A prepaid expense has not yet been consumed, so it must be removed from the current period's expense and shown as a current asset. Hence, prepaid expenses are deducted from the relevant expense account.
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About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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