Question

How do deferral adjustments for prepaid expenses - such as rent - that were initially recorded as assets affect assets on the balance sheet and expenses on the income statement?

Answer 1

Deferral adjustments for prepaid expenses like rent reduce assets on the balance sheet and increase expenses on the income statement as the service is used over time.

Step-by-step explanation:

Deferral adjustments for prepaid expenses, such as rent, that were initially recorded as assets will decrease assets on the balance sheet as the prepaid amount is recognized as an expense over time. This is due to the fact that with the passage of time, the benefit of the service (e.g., the rented space) is consumed and thus no longer provides future economic benefit. Consequently, the value of that asset is reduced and an expense is recorded on the income statement, increasing the total expenses reported for the period.