Final answer:
The adjusting entry for $1,000 of used-up prepaid advertising is made to report the advertising expense in the correct period and to decrease the prepaid advertising asset accordingly. This ensures that the company's financial statements accurately reflect its financial performance, adhering to accrual accounting principles.
Step-by-step explanation:
The purpose of the adjusting entry to record the $1,000 of prepaid advertising that had been used up during the quarter is to align the company's accounting records with the accrual basis of accounting. When a company pays for services in advance, these are initially recorded as an asset on the balance sheet because they represent future economic benefits. As the service is consumed, it no longer provides future benefit, and thus the asset needs to be decreased while the corresponding expense is increased.
By recording an adjusting entry, the company reports the advertising expense of $1,000 in the income statement of the period in which the advertising services were actually used, regardless of when the payment was made. This is crucial for providing a true and fair view of the company's financial performance for that quarter, ensuring that expenses match with the revenues they help to generate. Without this adjustment, the financial statements would not accurately reflect the company's financial position and performance.
Therefore, the adjusting entry serves to increase the advertising expense account and decrease the prepaid advertising asset account by the amount of the advertising that has been used.