Question

Prepaid expenses classified as current assets represent?

1) current year expenses that have been accrued.
2) current year cash payments that will be matched against revenues of the next year or for several future years.
3) cash that has been segregated to pay for future expenses.
4) expenses of the current year that have been paid in advance.

Answer 1

Prepaid expenses classified as current assets are expenses of the current year that have been paid in advance. They represent future economic benefits for services or goods to be received, and are recorded on the balance sheet as assets. Option 4 is the correct answer.

Step-by-step explanation:

Prepaid expenses that are classified as current assets on a company's balance sheet are expenditures that have been paid in advance for goods or services to be received in the future. They are not accrued expenses, nor are they cash segregated for future expenses, and they do not represent cash payments that will be matched against revenues of the next year or for several future years.

Instead, these are expenses that have already been paid for the current year, but the corresponding service or benefit will be received in subsequent period(s). Therefore, the correct option is: 4) expenses of the current year that have been paid in advance.

Prepaid expenses may include items such as insurance premiums, rent, or subscription services. These payments are recognized as assets because they provide probable future economic benefits to the business.