Question

If the prepaid expenses adjustment was not made,

Select one:

a. liability will be overstated, equity understated and expenses understated.

b. assets understated, equity understated and expenses overstated.

c. assets overstated, equity overstated, and expenses understated.

d. assets understated, equity understated and expenses understated.

Answer 1

Answer -

b. assets understated, equity understated and expenses overstated.

Explanation -

Meaning of prepaid expenses - prepaid expenses means expenses paid in advance and it is asset. In case of prepaid expenses not booked, it means assets are understated, expenses overstated and equity understated.

Prepaid expenses adjustment will reduce current period expenses and increase assets side.

Prepaid expenses adjustment entry -

Prepaid expenses ( asset ). Debit

Expenses. Credit