Question

Which of the following transactions would be recorded as a prepaid expense?

1) Payment for insurance coverage for the next six months
2) Purchase of office supplies
3) Payment of employee salaries
4) Payment of rent for the current month

Answer 1

The transaction recorded as a prepaid expense is the Payment for insurance coverage for the next six months, as it covers a future period, contrasting with expenditures for immediate consumption or use. Hence, the correct answer is option 1.

Step-by-step explanation:

Out of the options provided, the transaction that would be recorded as a prepaid expense is Payment for insurance coverage for the next six months. A prepaid expense represents a payment made for goods or services that will be received in the future.

For example, paying in advance for insurance coverage ensures that the policy remains active for the period covered by the payment, but the actual expense is recognized in the financial statements over the coverage period. Purchasing office supplies, paying employee salaries, and paying rent for the current month do not qualify as prepaid expenses because these are normal expenditures related to goods received or services rendered within the current accounting period.