Final answer:
Prepaid expenses require adjustment to ensure expenses are matched with the revenue in the same period, following the matching principle in accounting, and to accurately reflect the consumed value of the prepaid asset on the balance sheet.
Step-by-step explanation:
Prepaid expenses require adjustment at the end of each period to ensure that financial statements accurately reflect the expenses incurred and the remaining value of the prepaid assets. Since prepaid expenses are paid in advance, they are initially recorded as assets. As the benefit of the services or goods is consumed over time, part of the prepaid expense is recognized as an expense in the income statement, and the asset is reduced accordingly. This process, known as amortization for non-tangible assets or depreciation for tangible assets, aligns with the matching principle in accounting, which states that expenses should be matched with the revenue they helped generate in the same period. Without these adjustments, the income statement would not accurately represent the expenses, and the balance sheet would not show the correct asset value.